Not-for-Profit Accounting, Tax, and Reporting Requirements

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ffirs.qxd 7/1/03 9:45 AM Page iii

NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS EDWARD J. MCMILLAN, CPA, CAE

John Wiley & Sons, Inc.


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NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS

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NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS EDWARD J. MCMILLAN, CPA, CAE

John Wiley & Sons, Inc.

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Other books by Edward J. McMillan: Model Policies and Procedures for Not-for-Profit Organizations Not-for-Profit Budgeting and Financial Management The second edition of this book was titled Essential Accounting, Tax, and Reporting Requirements for Not-forProfit Organizations. This book is printed on acid-free paper. 嘷 ∞ Copyright © 2003 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, e-mail: [email protected]. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: ISBN 0-471-45316-1 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

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To my children, Sean and Terryn

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About the Author

Edward J. McMillan, CPA, CAE, has spent his entire career in not-for-profit financial management. He has served as the controller of the national office of the Associated Builders and Contractors and as the finance and membership director of the American Correctional Association. In 1993, McMillan was appointed faculty chair for finance for the United States Chamber of Commerce’s Institutes for Organization Management program. McMillan has written several books on not-for-profit financial management. His publishers include the American Society of Association Executives, McGraw-Hill, the U.S. Chamber of Commerce, and the American Chamber of Commerce Executives. McMillan now concentrates solely on speaking, writing, and consulting on financial management topics for associations and chambers of commerce. He lives near Annapolis, Maryland. In his free time, he enjoys coaching youth sports and motocross racing. You may contact McMillan at P.O. Box 771, Forest Hill, MD 21050; phone/fax: (410) 893-2308; e-mail: [email protected]. Also see his Web site at www.nonprofitguru.com.

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Contents

List of Exhibits Preface xiii

xi

Chapter 1 Classification of Tax-Exempt Organizations

1

Chapter 2 Disclosure of Information

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Chapter 3 Using CPA Firms and Understanding Their Functions

13

Chapter 4 Internal Revenue Service Audits

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Chapter 5 Tax on Unrelated Business Income and Form 990-T

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Chapter 6 Wholly Owned Taxable Subsidiaries

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Chapter 7 Restricted-Fund Transactions

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Chapter 8 Internal Control

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Chapter 9 The Accounting Policies and Procedures Manual

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Contents

Chapter 10 Tax Implications of Lobbying Expenditures

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Chapter 11 Other IRS Issues

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Chapter 12 IRS Filing Requirements and Forms

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Chapter 13 The Basics of Not-for-Profit Accounting and Financial Statements

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Chapter 14 The Basics of Intermediate Sanctions

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Chapter 15 The Basics of Filing IRS Form 990

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Appendixes Appendix A. Statement of Financial Accounting Standards #117: Financial Statements of Not-for-Profit Organizations 101 Appendix B. Statement of Financial Accounting Standards #116: Accounting for Contributions Received and Contributions Made 133 Appendix C. Statement of Financial Accounting Standards #124: Accounting for Certain Investments Held by Not-for-Profit Organizations

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Appendix D. Statement of Financial Accounting Standards #136: Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others 157

Glossary Index

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List of Exhibits

Exhibit Title 1.1 1.2 1.3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 7.1 7.2 8.1 11.1 A.1 A.2 A.3 A.4 A.5

IRS Classifications and Types of Tax-Exempt Organizations 2 Other 501(c) Classifications 5 Other Important IRS Classifications 6 Unqualified Opinion 15 Qualified Opinion 17 Adverse Opinion 19 Disclaimer of Opinion 21 Review 23 Compilation 25 Request for Proposal for Accounting Services 27 Not-for-Profit Organization’s Balance Sheet (Old Way) 58 Not-for-Profit Organization’s Statement of Financial Position (New Way) 61 Internal Control Checklist 66 Revenue Ruling 87-41: 20 Criteria 79 Not-for-Profit Organization’s Statement of Financial Position, December 31, 20XX 107 Not-for-Profit Organization’s Statement of Financial Position, December 31, Year 2 and Year 1 108 Not-for-Profit Organization’s Statement of Financial Position, December 31, 20XX 112 Not-for-Profit Organization’s Statement of Activities and Changes in Unrestricted Net Assets (Functional Basis), Year Ended December 31, 20XX 114 Not-for-Profit Organization’s Statement of Activities and Changes in Unrestricted Net Assets (Natural Basis), Year Ended December 31, 20XX 116

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List of Exhibits A.6

A.7 A.8 A.9

A.10 A.11 A.12 A.13

Not-for-Profit Organization’s Statement of Activities and Changes in Unrestricted Net Assets (Functional and Natural Matrix), Year Ended December 31, 20XX 118 Not-for-Profit Organization’s Statement of Financial Position, December 31, 20XX 120 Not-for-Profit Organization’s Statement of Activities, Year Ended December 31, 20XX 121 Not-for-Profit Organization’s Statement of Activities (with Activity in the Unrestricted, Temporarily Restricted, and Permanently Restricted Classes of Accounts), Year Ended December 31, 20XX 123 Not-for-Profit Organization’s Statement of Cash Flows (Direct Method), Year Ended December 31, 20XX 125 Not-for-Profit Organization’s Statement of Cash Flows (Indirect Method), Year Ended December 31, 20XX 127 Not-for-Profit Organization’s Statement of Changes in Net Assets (Vertical Method), Year Ended December 31, 20XX 129 Not-for-Profit Organization’s Statement of Changes in Net Assets (Matrix Method), Year Ended December 31, 20XX 130

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Preface

The accounting principles, tax issues, reporting requirements, and general work environment of not-for-profit organizations are remarkably different from similar issues affecting commercial organizations. This handbook is designed to help bookkeepers, managers, volunteers, and auditing CPA firms working with trade associations, professional associations, charities, chambers of commerce, and other not-for-profit organizations in their various financial responsibilities. It provides guidance and assurance in understanding and addressing their fiduciary obligations. The accounting standards addressed herein are in accordance with applicable standards promulgated by the American Institute of Certified Public Accountants and the Financial Accounting Standards Board, as of the date of this publication. Additionally, all tax issues and reporting requirements are similarly current. Edward J. McMillan, CPA, CAE September 2003

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NOT-FOR-PROFIT ACCOUNTING, TAX, AND REPORTING REQUIREMENTS

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CHAPTER

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Classification of Tax-Exempt Organizations ORGANIZATIONS QUALIFYING FOR EXEMPTION from federal income tax are granted exemption under the Internal Revenue Code (IRC), Section 501(a). The qualification process starts by completing one of these forms: ➢ Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the IRS Code, for 501(c)(3) organizations ➢ Form 1024, Application for Recognition of Exemption, for all other not-for-profit organizations Tax-exempt status applications are open for public inspection and must be retained for this purpose permanently. This issue is discussed in detail in Chapter 2, “Disclosure of Information.”

Essential IRS Classifications Of the many types of tax-exempt organizations, six are particularly important to notfor-profit professionals. They are listed in Exhibit 1.1 by type, advantages, and disadvantages. Exhibit 1.2 lists other 501(c) organizations, and Exhibit 1.3 lists other important IRS classifications of organizations.

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Not-for-Profit Accounting, Tax, and Reporting Requirements

EXHIBIT 1.1 IRS Classifications and Types of Tax-Exempt Organizations IRS Classification: 501(c)(3) (Public Charities) Qualifying Entities or Organizations ➢ Religious ➢ Charitable ➢ Scientific ➢ Educational ➢ Public safety testing ➢ Literary ➢ National or international amateur sports ➢ Organizations formed to prevent cruelty to children or animals Advantages ➢ Contributions are deductible by the donors. ➢ Postal rates are favorable. ➢ Organizations are exempt from the Federal Unemployment Tax Act (FUTA). ➢ State sales tax and other local tax exemptions are possible if allowable under state law. ➢ Foundations often require 501(c)(3) status before issuing grants. ➢ Exemption from Federal Insurance Contributions Act (FICA) tax election is available to clergy. Disadvantages ➢ Insubstantial amounts can be spent on lobbying to influence legislation. ➢ There is absolute prohibition from lobbying in election campaigns. ➢ Earnings cannot inure to individuals.

IRS Classification: 501(c)(3) (Private Foundations) 501(c)(3) organizations are further classified as either public charities or private foundations. This distinction is decided when completing Form 1023, the application for exemption. The major differences for private foundations are as follows: Disadvantages ➢ More reporting requirements on Form 990-PF ➢ Limitations on deductions for charitable contributions ➢ IRS-imposed operating restrictions

IRS Classification: 501(c)(4) ➢ Social welfare organizations ➢ Local associations of employees for charitable purposes

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Classification of Tax-Exempt Organizations

EXHIBIT 1.1 (Continued) Advantage ➢ Lobbying activities are unrestricted. Disadvantages ➢ Charitable contributions are not deductible by donors. ➢ There are no exemptions for FUTA, FICA, or state and local taxes. ➢ Earnings cannot inure to individuals. ➢ Foundations cannot participate in political activities. ➢ Postal rates are less favorable.

IRS Classification: 501(c)(5) ➢ Labor ➢ Agriculture ➢ Horticulture ➢ Unions Advantage ➢ There is no restriction on lobbying activities, including participation in political activities, which is not available to 501(c)(3) and 501(c)(4) organizations. Note: Under the Hatch Act, unions of federal government employees may not engage in political activities. See Section 527 (political action committees). Disadvantages ➢ Charitable contributions are not deductible by donors. ➢ No exemptions are available for FUTA, FICA, or state and local taxes. ➢ Earnings cannot inure to individuals. ➢ Postal rates are less favorable.

IRS Classification: 501(c)(6) ➢ Business leagues ➢ Trade associations ➢ Professional associations ➢ Chambers of commerce ➢ Boards of trade ➢ Real estate boards ➢ Professional football leagues not organized for profit Advantages ➢ There are no restrictions on engaging in lobbying or political activities. ➢ Contributions may be deductible as business expenses.

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EXHIBIT 1.1 (Continued) Disadvantages ➢ Charitable contributions are not deductible by the donors. ➢ There are no exemptions for FUTA, FICA, or state and local taxes. ➢ Postal rates are less favorable.

IRS Classification: 501(c)(7) ➢ Social clubs Advantages ➢ Advantages are essentially the same as for 501(c)(6) organizations. Disadvantages ➢ Disadvantages are essentially the same as for 501(c)(6) organizations, with the exception that there are strict limits on revenues from nonmembers; nonmember activity could result in conversion to a taxable entity.

IRS Classification: 501(c)(19) ➢ Armed forces organizations (at least 75 percent of the members must be present or past members of the armed forces). Advantages ➢ Advantages are essentially the same as for 501(c)(6) organizations, except that contributions are deductible as charitable contributions by the donors. Disadvantages ➢ Disadvantages are essentially the same as for 501(c)(6) organizations.

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EXHIBIT 1.2 Other 501(c) Classifications IRS Classification 501(c)(1) 501(c)(2) 501(c)(8) 501(c)(9) 501(c)(10) 501(c)(11) 501(c)(12) 501(c)(13) 501(c)(14) 501(c)(15) 501(c)(16) 501(c)(17) 501(c)(18) 501(c)(20) 501(c)(21) 501(c)(22) 501(c)(23) 501(c)(24) 501(c)(25)

Qualifying Entities or Organizations Organizations organized by an act of Congress Title-holding corporations for other 501(c) organizations Fraternal organizations producing life, sickness, accident, or other benefits to members or dependents Employee beneficiary organizations providing life, sickness, accident, or other benefits to members, dependents, or beneficiaries Fraternal societies devoted to religious, charitable, educational, scientific, or literary purposes, excluding life, sickness, and accident benefits Local teacher retirement fund associations Local ditch, irrigation, telephone, and life insurance associations Cemetery, burial, and cremation organizations Credit unions without capital stock Insurance companies other than life or marine with receipts under $150,000 Farmers cooperative associations Supplemental unemployment benefits trusts Pension plans funded by employees and organized before June 25, 1959 Legal services plans Black Lung Acts benefits Employment Retirement Income Security Act of 1974 benefits Organizations of past or present members of the armed forces Employee Retirement Income Security Act of 1974 trust described in Section 4049 Other title-holding trusts or corporations

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EXHIBIT 1.3 Other Important IRS Classifications IRS Classification Section 527 Section 528 Section 501(d) Section 501(e) Section 501(k)

Qualifying Entities or Organizations Political organizations Homeowners’ associations Religious and apostolic organizations Cooperative hospital service organizations Child care organizations

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Private Foundations There are two types of 501(c)(3) organizations: publicly supported organizations and private foundations. Typically, private foundations are associated with large corporations and wealthy families that don’t find it necessary to solicit the public for support. There are several rules that affect private foundations, the most important of which are as follows: ➢ Private foundations are prohibited from lobbying. ➢ There is significantly more paperwork and reporting involved. ➢ There is an excise tax on net investment income. Private foundations file Form 990-PF.

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CHAPTER

2

Disclosure of Information

AS PART OF THEIR TAX-EXEMPT STATUS, most not-for-profit organizations are required to make certain records available for public inspection. The requirement does not apply to churches, certain church-related religious organizations, and private foundations having separate inspection requirements. For the majority of not-for-profit organizations required to disclose information, the law addresses the following, all discussed in this chapter: ➢ Effective date ➢ Who has the right to inspect records ➢ Which records must be made available for inspection ➢ Group returns ➢ Which records are exempt from inspection ➢ Place of inspection ➢ Requests made in person ➢ Requests made in writing ➢ Penalties for noncompliance ➢ Reimbursement of expenses ➢ Inspection of records through the IRS ➢ State requirements ➢ Exceptions

Who Has the Right to Inspect Records Anyone requesting to review applicable documents must be provided access. Additionally, individuals are not required to reveal why they are making the request.

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Which Records Must Be Made Available for Inspections ➢ Form 990, Form 990-EZ, Form 990-BL, and Form 1065, including all schedules and attachments. Requesters can ask for certain specific information only, such as Part V of Form 990, List of Officers, Directors, Trustees, and Key Employees. The organization must furnish the most current three years of these forms. Note: If the tax-exempt organization has chosen to include the names and addresses of contributors to the organization with the above-noted returns, the organization may elect not to disclose this information. ➢ Form 1023, Application for Recognition of Exemption Under Section 501(c)(3), or Form 1024, Application for Recognition of Exemptions Under Section 501(a). If the tax-exempt organization was founded before July 15, 1987, the organization must make this information available if it still has a copy of the form. ➢ All correspondence submitted by the tax-exempt organization supporting these documents, as well as correspondence issued by the IRS with respect to these documents.

Group Returns If a not-for-profit organization does not file Form 990 because it is included in a group return, it must acquire a copy of the group return and make the material available for inspection. The requester has the right to request the inspection directly from the parent organization.

Which Records Are Exempt from Inspection Not-for-profit organizations are not required to provide public access to the following: ➢ Form 990-T, Exempt Organization Income Tax Return ➢ Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations ➢ Names and addresses of contributors If names and addresses of contributors have been included in schedules submitted with Form 990 and Form 990-EZ, this information can be deleted from the package of information provided to the inspector.

Place of Inspection If a not-for-profit organization has a permanent headquarters, the documents being inspected must be made available at that location. If the organization does not have

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Disclosure of Information

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a permanent headquarters, the documents must be made available at a reasonable location of the organization’s choice. The organization can mail the information requested if the requester agrees to forgo an on-site inspection. If an organization has more than one location, such as regional offices, a copy of the applicable documents must be made available for inspection at the other locations. Service facilities, such as warehouses, need not retain the applicable documents.

Penalties for Noncompliance Responsible persons of a tax-exempt organization who do not provide informative returns required may be subject to a penalty of $20 per day for as long as the failure continues, for a maximum of $10,000. There is no maximum penalty for failure to provide a copy of an exemption application. An individual denied access to applicable records can alert the IRS and request enforcement action through the director of the Exempt Organizations Division.

Reimbursement of Expenses A not-for-profit organization can charge the inspector for photocopying and postage expenses. Reimbursable expenses include the following: for photocopying, $1 for the first page and 15 cents for subsequent pages; for postage, actual costs.

Inspection of Records through the IRS Copies of Forms 990, 990-EZ, and 990-PF and applications for exemption are available for public inspection and copying on request directly through the IRS. A request for inspection must be in writing and must include the name and address of the organization that filed the return. A request to inspect a return also should indicate the number of the return and the years involved. The request should be sent to the director (attention: disclosure officer) of the district where the requester desires to inspect the return or application. If an inspection at the IRS national office is desired, the request should be sent to the Commissioner of Internal Revenue (attention: Freedom of Information Reading Room, 1111 Constitution Ave., N.W., Washington, DC 20024). An inspector can request a copy of the documents by using Form 4506-A. There is a fee for photocopying.

Requests Made in Person Documents required to be disclosed must be provided on the day of request, or the next business day if unusual circumstances exist. The time cannot exceed five days.

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Requests Made in Writing Written requests for documents must be fulfilled within 30 days of the request or within 30 days after receiving payment for expenses.

Exemptions Organizations may be exempt from the requirement of providing copies if: 1. The organization has already made the copies widely available through the Internet. The organization must make available its URL address. 2. The Secretary of the Treasury determines, on application by the tax-exempt organization, that the organization is the object of a harassment campaign.

State Requirements This chapter deals exclusively with federal regulations. The organization probably also must meet additional state disclosure of information requirements. This information usually can be found in the state not-for-profit organizations law handbook. This chapter discusses information and documents that must be disclosed by law. If a not-for-profit organization elects to allow access to other records, an applicable policy on who may inspect which records should be included in the organization’s board-approved manual on accounting and financial policies and procedures.

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CHAPTER

3

Using CPA Firms and Understanding Their Functions THE RELATIONSHIP between the not-for-profit organization and its independent CPA firm is important, but the function of the CPA firm is often misunderstood. Typically, a not-for-profit enters a relationship with an independent CPA firm because of a requirement in its bylaws or because it is forced into the relationship by a third party. Examples of third parties requiring not-for-profit organizations to be audited are lending institutions, government granting agencies, and foundations giving grants.

Services Offered by CPA Firms This chapter discusses three types of services CPA firms offer not-for-profit organizations—audits, reviews, and compilations—as well as other services firms sometimes offer.

Audits A certified audit by an independent CPA firm is the most common service used by a not-for-profit organization. In an audit, the CPA firm expresses an opinion on the notfor-profit organization’s financial statements. To be legally qualified to audit an organization and express an opinion on its financial statements, the CPA firm must have a license issued by the state board of public accountancy. By law, only certified public accountants are entitled to audit organizations and express an opinion on their accuracy. The objective of an audit is to assure the reader of the financial statements that the statements have been audited, that they conform to Generally Accepted Accounting Principles (GAAP), and that the audit is done according to Generally Accepted Auditing Standards (GAAS). Once the audit fieldwork has been completed, the CPA firm issues one of four

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Not-for-Profit Accounting, Tax, and Reporting Requirements types of opinions on the financial statements: unqualified opinion, qualified opinion, adverse opinion, or disclaimer of opinion. It is important to recognize the differences in the four opinions. The various opinions affect the organization’s ability to borrow money and the membership’s perception of the capacity of management to professionally manage the financial operation.

Unqualified Opinion Every not-for-profit organization should strive to receive an unqualified opinion on its financial statements from the CPA firm auditing it. Unqualified opinions state that the financial statements are “presented fairly”; these opinions are, in essence, a clean bill of health. Full assurance on the accuracy of the financial statements is provided to the reader. Audits of financial statements issued by an independent CPA firm will include, at a minimum, the following: ➢ Opinion Letter on the CPA firm’s letterhead ➢ Statement of Financial Position (Balance Sheet) ➢ Statement of Activities (Income Statement) ➢ Statement of Changes in Net Assets ➢ Statement of Cash Flows ➢ Footnotes to the financial statements An example of the wording of an unqualified opinion is shown in Exhibit 3.1.

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EXHIBIT 3.1 Unqualified Opinion Independent Auditor’s Report To the Board of Directors of We have audited the accompanying Statement of Financial Position of as of (at) , 20 , and the related Statements of Activities, Net Assets, and Cash Flows for the year then ended. These financial statements are the responsibility of the organization’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Generally Accepted Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of as of , 20 , and the results of its operations and its cash flows for the year then ended in conformity with United States Generally Accepted Accounting Principles.

Firm’s signature

Location of firm (city, state) , 20 Report date

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Qualified Opinion A qualified opinion on the financial statements suggests that there is a material problem with one or more aspects of the statements. In other words, the CPA firm is stating that except for this problem (or problems), the financial statements have been presented fairly. An example of the wording of a qualified opinion is shown in Exhibit 3.2.

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EXHIBIT 3.2 Qualified Opinion Independent Auditor’s Report To the Board of Directors of We have audited the accompanying Statement of Financial Position of as of , 20 , and the related Statements of Activities, Net Assets, and Cash Flows for the year then ended. These financial statements are the responsibility of the organization’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Generally Accepted Auditing Standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As more fully described in Note X to the financial statements, the organization has valued property and equipment at a nominal value of one dollar. Also, the organization leases its premises under an agreement that provides for a nominal annual rental of one dollar. In recognition of that rental agreement, the Board of Directors established a value of $XXX for the lease in 20X0. That amount was capitalized and is being amortized over a XX-year period ending 20X0. In our opinion, property and equipment should be recorded at cost, if purchased, or at fair value, if donated or contributed, to conform with Generally Accepted Accounting Principles, and those amounts should be depreciated over the estimated useful lives of the assets. Also, in our opinion, the value to the organization of its use of space at nominal rent should be shown as a period expense with a corresponding addition to paid-in or contributed capital. The effects on the financial statements of the preceding practices are not reasonably determinable. In our opinion, except for the effects of the matters discussed in the preceding paragraph, the financial statements referred to in the first paragraph present fairly, in all material respects, the financial position of as of , 20 , and the results of its operations and its cash flows for the year then ended in conformity with United States Generally Accepted Accounting Principles.

Firm’s signature

Location of firm (city, state) , 20 Date

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Adverse Opinion An adverse opinion is unusual. By issuing such an opinion, the independent CPA firm is saying that the financial statements do not conform with GAAP and are not presented fairly. An example of the wording of an adverse opinion is shown in Exhibit 3.3.

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EXHIBIT 3.3 Adverse Opinion Independent Auditor’s Report To the Board of Directors of As discussed in Note X to the financial statements, the organization carries its property, plant, and equipment accounts at appraisal values and provides depreciation on the basis of such values. Further, the organization does not provide for income taxes with respect to differences between financial income and taxable income arising because of the use, for income tax purposes, of the installment method of reporting gross profit from certain types of sales. Generally Accepted Accounting Principles require that property, plant, and equipment be stated at an amount not in excess of cost, reduced by depreciation based on such amount, and that deferred income taxes be provided. Because of the departures from Generally Accepted Accounting Principles identified above, as of December 31, 20X2 and 20X1, inventories have been increased $ and $ by inclusion in manufacturing overhead of depreciation in excess of that based on cost, property, plant, and equipment, less accumulated depreciation, is carried at $ and $ in excess of an amount based on the cost to the organization; and deferred income taxes of $ and $ have not been recorded, resulting in an increase of $ and $ in retained earnings and in appraisal surplus of $ and $ , respectively. For the years ended December 31, 20X2 and 20X1, cost of goods sold has been increased $ and $ , respectively, because of the effects of the depreciation accounting referred to above, and deferred income taxes of $ and $ have not been provided, resulting in an increase in net income of $ and $ , respectively. In our opinion, because of the effects of the matters discussed in the preceding paragraphs, the financial statements referred to above do not present fairly, in conformity with United States Generally Accepted Accounting Principles, the financial position of X Organization as of December 31, 20X2 and 20X1, or the results of its operations or its cash flows for the years then ended.

Firm’s signature


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Disclaimer of Opinion Disclaimers of opinion by independent CPA firms are unusual and generally are issued because of litigation, the unavailability of records, or other issues that would make the financial statements unreliable and unpredictable. An example of the wording of a disclaimer of opinion is shown in Exhibit 3.4.

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EXHIBIT 3.4 Disclaimer of Opinion (Lawyer’s letter not obtained) Independent Auditor’s Report To the Board of Directors of We were engaged to audit the accompanying Statement of Financial Position of as of 31, 20 , and the related Statements of Financial Position, Net Assets, and Cash Flows for the year then ended. These financial statements are the responsibility of the organization’s management. We were unable to obtain a discussion or evaluation of the pending or threatened litigation described in Note X from the organization’s outside legal counsel. Because of this, the scope of our work was not sufficient to enable us to express an opinion on the financial statements referred to in the first paragraph.

Firm’s signature


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Review Often circumstances do not require a full audit of the financial records. The next step down from an audit is a review of the financial statements. In a review, the CPA firm does not adhere to rigid auditing standards and instead principally applies analytical procedures to financial data and its inquiries of personnel. Because the review is narrower in scope than an audit, it is not considered an opinion. Reviews provide limited assurance of the accuracy of the financial statements to the reader. An example of the wording in a review is shown in Exhibit 3.5.

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EXHIBIT 3.5 Review

To the Board of Directors of I (We) have reviewed the accompanying Statement of Financial Position of as of , 20 , and the related Statements of Activities, Net Assets, and Cash Flows for the year then ended, in accordance with standards established by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of management. A review consists principally of inquiries of organization personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with Generally Accepted Auditing Standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, I (we) do not express such an opinion. Based on my (our) reviews, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with United States Generally Accepted Accounting Principles.

Firm’s signature


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Compilation Often an organization wants a relationship with a CPA firm but cannot afford or does not need an audit or a review. The next step down is called a compilation. In a compilation, the CPA firm does not apply any auditing standards or analytical procedures at all. It presents the financial statements in the proper financial formats, but the financial statements are the representation of management. No assurance at all on the accuracy of the statements is provided to the reader by the CPA firm. An example of the wording of a compilation is shown in Exhibit 3.6.

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EXHIBIT 3.6 Compilation

To the Board of Directors of I (We) have compiled the accompanying Statement of Financial Position of as of , 20 , and the related Statements of Activities, Net Assets, and Cash Flows for the year then ended, in accordance with standards established by the American Institute of Certified Public Accountants. A compilation is limited to presenting, in the form of financial statements, information that is the representation of management. I (We) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

Firm’s signature


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Other Services Not-for-profit organizations often contract with independent CPA firms for other services, sometimes not related at all to accounting or tax, where independence is required or expertise in certain areas may be needed. An example of using a CPA firm’s reputation for independence is to use the firm to count ballots in an election. If ballots are sent directly to the CPA firm and the CPA firm deals with a tellers committee directly, possible ballot tampering by management is virtually eliminated. Examples of using CPA firms for their expertise in certain areas include data processing services, management consulting services, and the preparation of tax returns.

Choosing a CPA Firm Because of the relationship between the not-for-profit organization and the independent CPA firm, it is important to choose the right CPA firm. The most important factor in choosing a CPA firm to audit the financial records of a not-for-profit organization is selecting a firm that specializes in not-for-profit organizations. The accounting principles and taxation issues of not-for-profit organizations are different from those for commercial organizations.

Request for Proposal A simple and objective way to choose a CPA firm is to send a request for proposal (RFP) to CPA firms specializing in not-for-profit organizations. Reliable resources for finding names of such firms include local and state societies of CPAs and allied societies of the American Society of Association Executives. To save time and avoid confusion for both the organization and the CPA firms, the RFP should be detailed and should state exactly the services required by the organization. A CPA firm should be told specifically what to expect if it is selected for the audit. An example of an RFP for auditing services is shown in Exhibit 3.7.

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EXHIBIT 3.7 Request for Proposal for Accounting Services Not-for-Profit Organization Letterhead Date Smith & Jones, Certified Public Accountants 123 Main Street Washington, DC Dear : Your firm has been selected as a candidate to provide tax, accounting, and auditing services for our organization and its affiliates. We encourage you to submit your proposal for consideration. To help you in the preparation of your response, we have enclosed information on our organization and have included our annual report, membership brochures, a magazine, a newsletter, publication brochures, training workshop brochures, and audited financial statements. Organization Specifics Headquarters Address: IRS Classification: 501(c)(

)

Number of Members: Fiscal Year: From

to

Approximate Number of Revenue Transactions: Approximate Number of Expense Transactions: Affiliated Entities Requiring Audits: Services Required

Audited Financial Statements Tax Return Preparation: Form 990 Form 990-T Personal Property Tax Return

Staff Contact Please direct your proposal to

, our chief financial officer, at the above address.

Selection Criteria This request for proposal is being sent to CPA firms specializing in audits of not-for-profit organizations.

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EXHIBIT 3.7 (Continued) Of those responding, firms will be selected to interview with the organization’s board of directors, who will make the final selection. The interview will last no longer than minutes. The interview will consist of a presentation by the CPA firm of no more than minutes followed by minutes of questions. Notification Date Firms selected for an interview will be notified no later than will be notified on the same date. Selection of the firm to be retained will be announced no later than

. Firms not selected .

Information Required Please include with your response the following information about your firm: ➢ A brief history of your organization ➢ Credentials of individuals who will be assigned to the audit ➢ A reference listing of not-for-profit organizations, including contact name ➢ Your written permission to contact your references ➢ Anticipated fee for services Deadline Date To be eligible for consideration, your response must be postmarked by . Deadline extensions will not be granted. We trust the information provided in this request for proposal is sufficient, but if further information is required, please limit your inquiries to the staff contact noted. Thank you for your time, and we are looking forward to receiving your proposal.

Sincerely,

Name

Title

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From the proposals received, the organization should select the firms for the interview with the appropriate body.

The Interview The interview should last no longer than 45 minutes. It has two stages: a short presentation by the CPA firm and questions directed to the CPA firm. The interview team should consist of, at a minimum, the organization’s chief staff executive, chief financial officer, and representatives of the board of directors, specifically the treasurer and chief elected officer. Additionally, if an organization has an audit committee, it also should be represented. The questions posed to CPA firm representatives are important. Prepare your questions in advance, and ask the same questions of each firm being interviewed. Note and evaluate the responses. Ask questions to help you gauge the respondent’s knowledge of issues important to not-for-profit organizations. Questions may concern the following: ➢ Current IRS issues affecting not-for-profits ➢ Current legislation affecting not-for-profits ➢ Current accounting issues affecting not-for-profits ➢ The CPA firm’s opinion on specific tax issues pertinent to your organization As in any budgeting process, the most qualified firm with the lowest fee should be selected for the audit. Once a firm has been selected, the not-for-profit organization should expect the following sequence of events: ➢ An engagement letter ➢ Audit fieldwork ➢ Issuance of audited financial statements ➢ Issuance of the management letter

The Engagement Letter Representatives of the not-for-profit should meet with representatives of the auditing firm to discuss the engagement letter. The not-for-profit can use the engagement letter as an opportunity to control audit fees and to ensure that audited financial statements will be issued by a certain date and that tax returns will be prepared by a certain date. Audit fees can be controlled by reviewing the CPA firm’s previous year’s working papers to ascertain what tasks can be performed by staff internally instead of by the auditors and discussing how record keeping can be improved to reduce auditor

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Not-for-Profit Accounting, Tax, and Reporting Requirements involvement. One way to control audit fees is to have your organization’s staff prepare every accounting schedule. Then, all the auditing firm has to do is audit the supporting schedules related to the financial statements. It is likely to be more cost effective to have your staff prepare accounting schedules at their hourly rates than to have a CPA firm do it at its hourly rate.

Audit Fieldwork Once an agreement has been reached by the not-for-profit organization and the CPA firm via the engagement letter, the CPA firm starts the audit fieldwork. During this segment of the audit, the auditors work at the client’s office. It is typically viewed as an inconvenience by the organization’s staff, and a good auditing firm is sensitive to this fact. However, fieldwork is a necessary part of the audit sequence. The time auditors spend on site can be reduced if records are in proper order, staff have prepared supporting schedules, and the organization is ready to be audited.

Issuance of Audited Financial Statements Once fieldwork is complete, the audit working papers are reviewed by senior CPAs and partners before the audited financial statements are prepared. Assuming no problems exist, the statements are prepared and distributed to the not-for-profit organization. It is the auditor’s responsibility to deliver the statements to top staff management of the organization. The statements are, however, addressed to the board of directors. It is the responsibility of the chief executive officer, the chief financial officer, or both to distribute the audited financial statements to the board of directors.

Issuance of the Management Letter During the audit, the CPA firm may discover problems that affect the general operational effectiveness of the not-for-profit. If, in the professional opinion of the CPA firm, these problems are material, the firm is required to report the issues to the board of directors via the CPA management letter. The management letter is an important document and is designed to be a management tool. The not-for-profit should consider all problems noted as being important to the organization and be prepared to take corrective action. Management of the not-forprofit should view the management letter as an opportunity for the CPA firm to report to the board on problems and recommendations about which management has been unable to convince the board that action is required. Examples include understaffing, obsolete equipment, and uncompetitive salary ranges.

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Typically, a representative of the CPA firm will make himself or herself available to discuss both the audited financial statements and the management letter with the organization’s board of directors. It is the board’s responsibility to direct staff to correct deficiencies noted in the management letter and to follow up accordingly.

Hints Unfortunately, it is common for a not-for-profit organization to pay for an expensive and time-consuming audit by a CPA firm, then not use the audited financial statements to the organization’s advantage. Rather than just filing the audited statements, consider the following: ➢ Reduce the possibility of an IRS audit by attaching a copy of the audited financial statements to the organization’s IRS Form 990 and 990-T or any other document subject to audit, such as personal property tax returns. (See Chapter 4, “Internal Revenue Service Audits,” for further explanation.) ➢ Send a copy to the organization’s bank and instruct it to start a file. ➢ Send a copy to the organization’s insurance company. ➢ Store a copy off premises in a safe deposit box with a copy of the organization’s annual report. In case of a fire or other catastrophe, an organization’s historical perspective could be lost if information is not stored off site. ➢ Consider publishing the audited financial statements in the organization’s newsletter.

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CHAPTER

4

Internal Revenue Service Audits

NOT-FOR-PROFIT, TAX-EXEMPT ORGANIZATIONS, considered taxpayers by the IRS, are subject to IRS audit examinations. IRS audits are often costly, time consuming, and embarrassing when the circumstances of audit exceptions are revealed. The IRS has the advantage over the not-for-profit organization selected for an audit. The audit plan of action formulated by the organization should be designed to take the advantage away from the IRS.

Avoiding IRS Audits A not-for-profit organization should do everything within its power to avoid being audited by the IRS. The best way to handle an IRS audit is not to be selected for one. Although avoiding an audit cannot be guaranteed, the possibility of being selected for an audit can be significantly reduced by following four basic rules: 1. File on time. Unless there is a compelling reason to apply for an automatic extension to file the tax returns, it is advisable to file on time. As part of their agreements with their independent CPA firms, it is common practice for not-for-profit organizations to have in writing the understanding that tax deadlines will be met without filing extensions. Not-for-profit organizations have until the fifteenth day of the fifth month after the tax year to file tax returns. An application for an extension gives the appearance that the financial records may not be in order and may trigger an audit. 2. Have the tax returns reviewed. Before sending in the tax returns, have them reviewed for accuracy and completeness by an experienced tax preparer who did not work on the return. Anyone can make a mistake, and mistakes attract IRS attention. A simple mathematical error or failure to check a box may be noticed by the IRS and may cause the organization to be selected for audit.

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Not-for-Profit Accounting, Tax, and Reporting Requirements If the tax return preparer has professional credentials, such as CPA or attorney at law, ensure the credentials are noted on the signature line of the return. Stating that the return was prepared by a professional lends credibility to the return. 3. Do not attract the IRS’s attention. Ensure that the return is complete, but do not include unnecessary notes or explanations of how figures were computed, the tax rationale, and the like. The simpler the return, the less chance it will be selected for audit. Additionally, ensure that the return is signed by a corporate officer and the tax return preparer. 4. Send a copy of the audited financial statements with the return. When a not-forprofit organization is audited by an independent CPA firm, the organization typically receives an unqualified audit opinion with no tax issues noted. If an organization receives this opinion, it is a good idea to send in a copy of the audited financial statements with the return. IRS examiners know that an audit by an independent CPA firm suggests that the not-for-profit organization is serious about financial management. Sending in a copy of the CPA’s audited financial statements is a declaration that the financial records are in order and the tax returns have been prepared professionally.

Handling IRS Audits If the organization has been selected for an IRS audit, it will receive a letter stating that it is to be audited. The letter will include the following: ➢ Name and telephone number of the IRS agent ➢ Entity(s) being audited ➢ Year(s) being audited ➢ Location and time of the audit ➢ Preliminary list of materials to be examined Once selected, the not-for-profit organization should approach the audit aggressively and follow the 14 rules of handling IRS audits.

Rule 1: Delay the Audit The organization selected for an IRS audit has the right to request a delay in the examination to get organized and resolve schedule conflicts. Always exercise this right. Call the IRS agent, state why the first date is not acceptable, and request that it be rescheduled; make notes as to the date, the IRS staff person you spoke to, and the reason for the requested postponement. If an agent shows up at the organization’s office on the first date, proof of the request to reschedule should be available.

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Delaying the audit often results in never hearing from the IRS again concerning the audit. Why? Anything can happen on the IRS’s end, such as work backlogs, retirements, agent transfers, illnesses, and other priorities, which may result in the audit being cancelled.

Rule 2: Try to Handle the Audit Informally Often, a not-for-profit organization is selected for an IRS audit because one or two items look suspicious. It is wise to call the agent to find out whether a particular item has triggered the examination. If it has, you may be able to resolve the issue by correspondence, and the agent may not find it necessary to conduct a field examination.

Rule 3: Try to Have the Audit Conducted at Your CPA’s Office Professional accountants and tax return preparers are experienced in dealing with the IRS. They know what information is proprietary, what to say, and, more important, what not to say. It is reasonable to make this request, and the IRS will often agree. In a related matter, it is wise to change the organization’s address on the IRS’s records to the CPA’s address. IRS field audits are often scheduled at the address on the IRS’s records. Additionally, a request to have the audit conducted at the accountant’s office has more credibility when that is where tax returns and other IRS correspondence are sent.

Rule 4: Get Ready Gather everything the IRS agent may want to examine for the audit in advance. Typically, an IRS field audit involves four areas: organizational documents, financial documents, contractual documents, and publications.

Organizational Documents Organizational documents include the following: ➢ IRS not-for-profit classification determination letter ➢ Articles of incorporation ➢ Bylaws ➢ Organizational chart ➢ Names and addresses of officers ➢ Charter or subsidiary agreements ➢ Minutes ➢ Manual on accounting and financial policies and procedures

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Not-for-Profit Accounting, Tax, and Reporting Requirements Have these items photocopied so they will be ready for the agent if requested. Two of these items warrant further discussion: minutes and the manual for accounting and financial policies and procedures. Concerning minutes, avoid using buzzwords, such as political, legislation, lobbying, tax avoidance, and similar words that suggest political activities or tax evasion. These words can lead to an in-depth examination of your organization’s activities. In regard to the policies and procedures manual, a board-approved manual on accounting and financial policies and procedures that is current with IRS tax issues and Generally Accepted Accounting Principles (GAAP) is documentation that your organization is attempting to operate in accordance with conventional accounting rules and IRS regulations. This can go a long way when negotiating the settlement of a problem.

Financial Documents Financial documents include the following: ➢ Audited financial statements ➢ Chart of accounts ➢ General ledger and supporting schedules ➢ Tax return for the year in question and the preceding and subsequent years ➢ Payroll returns and documents ➢ Form 1099s ➢ Bank statements ➢ Employee benefit documents Two of these items require further discussion: the chart of accounts and the Form 1099s. The chart of accounts is typically a growing and ever-changing document. Old charts of accounts should be maintained as a permanent accounting record both for IRS audits and for audits by independent CPA firms. It may look suspicious when an audit reveals accounts that do not appear on the chart of accounts. With regard to Form 1099s, the IRS looks at these forms carefully to determine whether independent contractors should be classified as employees. You should attach the results of the IRS’s 20-question questionnaire (see Chapter 11, Exhibit 11.1, Revenue Ruling 87-41) and the justification of the decision to the individual’s independentcontractor agreement as substantiation for the classification. The penalties for making an error in employee versus independent-contractor classification are severe.

Contractual Documents Contractual documents include the following: ➢ Office leases ➢ Equipment leases

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➢ Job descriptions ➢ Employment contracts ➢ All other contracts The primary purpose for reviewing contracts is to investigate contracts with members and staff of the organization to decide whether any individuals have benefited unfairly by virtue of membership. If less-than-arm’s-length transactions exist, tax-exempt status may be in jeopardy. This is of particular importance considering intermediate sanctions, discussed in detail in Chapter 14.

Publications Publications include the following: ➢ Magazines ➢ Newsletters ➢ Promotional brochures The IRS examines publications to determine that advertising is reported on Form 990-T, to ensure that postal permits are used exclusively by the organization holding the permit, and to ensure that the organization is not engaging in improper lobbying or political activities. When preparing for an IRS audit, you should review any prior audit exceptions to ensure that problems have been addressed and corrected.

Rule 5: Get the Staff Ready You should appoint an audit coordinator to interact with the IRS field agent. This person should be competent and experienced in handling IRS audits. If the organization is not satisfied and comfortable with having a staff member take on this responsibility, it should contract with an outside professional. The other staff should be instructed that the audit coordinator is the only person allowed to discuss business with the IRS field agent.

Rule 6: Conduct a Mock Audit After everything is assembled and staff members know their roles, hire an outside CPA experienced with not-for-profit organizations and IRS audits to conduct a mock audit. The CPA should assume the role of an IRS agent—request documents to be reviewed and so forth. At the conclusion of the mock audit, audit exceptions can be examined and corrected, rationales for tax positions can be formulated, the completeness of the audit coordinator’s work can be evaluated, and so forth. Conducting a mock audit is inexpensive when considering the alternative of an extended IRS visit, tax increases, penalties, interest, and other costs.

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Rule 7: Decide Where to Locate the IRS Field Agent Many not-for-profit organizations strive to make the IRS field agent comfortable. This is a mistake, because pleasant surroundings and work conditions may lead to an extended field audit, and the IRS agent must justify this extra time. Typically, an agent justifies extended audits by uncovering additional problems. When deciding where to locate IRS field agents: ➢ Don’t locate them in the accounting department, where they can observe operations, inspect files, etc. ➢ Don’t put them in a library or conference room, where minutes, publications, and other information regarding the organization may be available. It may be best to locate the agent at a table in an open area where his or her time on the audit can be easily observed by staff.

Rule 8: Take the Offensive Have your independent CPA present at the first meeting with the IRS field agent to discuss what the agent intends to examine, how long the audit is expected to take, when the agent intends to be on site, and other important matters related to the audit examination. Assuming that the agent agrees, the first meeting between the not-forprofit organization and the IRS auditor should be recorded, or, at a minimum, notes should be taken and retained in case problems occur. The purpose of a meeting of this nature is to provide time to research the rights of the not-for-profit organization regarding providing proprietary information, withholding information outside the realm of the period being examined, and similar matters. In addition to having the organization’s CPA and CFO present, also consider the following: the organization’s counsel, the chief staff executive, the chief elected officer, and the treasurer.

Rule 9: Put Everything in Writing As part of taking the offensive, tell the IRS field agent that your organization would prefer that the agent request in writing all items to be audited. Questions posed to your organization also should be in writing. Tell the agent that the documents requested and answers to the questions asked will be provided by the next working day. The requests for documents to be examined and questions posed should be forwarded to your organization’s outside CPA. The CPA firm will evaluate and make recommendations on the formal responses. This practice gives your organization time to find out whether the agent is entitled to review the documents requested; it also gives you time to formulate official responses to questions. When documents and answers to questions are provided, the IRS agent should

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be asked to sign for the documents. A permanent record of documents examined and answers to questions posed should be retained in your audit file. Finally, written documentation of the IRS agent’s time on the audits should be noted in a log and retained in your organization’s audit file.

Rule 10: Don’t Volunteer Give the auditor the records he or she is entitled to review, but do not volunteer any other records and do not allow the auditor random access to files. An organization undergoing an IRS audit only thinks all records are in order and will withstand audit scrutiny. Unfortunately, volunteering information and allowing random access to files and records may result in the auditor’s reviewing documents with problems. This may lead to an extended, more in-depth audit.

Rule 11: Keep Audited Records Separate Until the audit is fully resolved, do not refile documents the auditor has reviewed. Keep the documents separate from general files, where they will be readily avalible. If the IRS audit turns up a problem, the not-for-profit organization will most likely protest the conclusions of the audit at the federal building. If the records are kept separate, it would be a simple matter to take all documents reviewed to the meeting location.

Rule 12: Avoid the IRS “Fishing Expedition” Keep the IRS audit confined to the year and the entity in question. IRS agents are, by law, entitled to review only certain documents, but it is possible for them to ask to review documents from different entities or different years. Have the field agent put requests to review documents in writing. If there is any doubt about the agent’s right to review documents, get professional advice before responding. Providing an IRS agent information that the IRS may not be entitled to examine may lead to extended audits, audits of different years, audits of different entities, and even audits of individuals.

Rule 13: Do Not Sign Any Documents without Professional Advice During an IRS examination it is likely that your organization will be requested to sign documents relating to the audit. Do not sign anything without having an experienced professional review the request. Signing documents may result in the following: ➢ Lead to extended audits ➢ Give the IRS permission to review proprietary documents or documents it is not entitled to review ➢ Extend the statute of limitations on documents eligible to be reviewed

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Rule 14: Always Have a Board-Approved Accounting Policies and Procedures Manual Assuming the manual is current and is in accordance with accounting regulations and tax law, and the organization is operating in accordance with its policies, IRS field auditors will view the existence of an accounting policies and procedures manual as an attempt to comply with requirements, and the manual will be viewed as valuable audit documentation. For additional information on policies and procedures, see Model Policies and Procedures for Not-for-Profit Organizations (Edward J. McMillan, John Wiley & Sons, Inc., 2003).

Tips Problem The CPA firm currently retained is not the CPA firm engaged for the year being audited. Representation could be expensive.

➩ Tip As part of the engagement agreement with an independent CPA firm, ask the firm to provide a copy of the CPA working papers to your organization at the conclusion of its audit. Working papers often document tax rationale, provide detailed schedules of subsidiary records, and so forth.

Problem Figures on audited financial statements do not agree with figures as they appear on the tax return.

➩ Tip As part of the engagement agreement, request that the independent CPA firm provide a reconciliation that coordinates items as they appear on tax returns and audited financial statements. This could be a considerable time-saver.

Problem The not-for-profit organization is routinely selected for IRS audits.

➩ Tip Complain. Something is wrong if your organization is routinely audited. Contact the district director of the IRS, state that your organization is audited routinely, and ask to be informed why. Bringing this matter to the attention of the district director may resolve the problem.

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Problem The IRS field auditor takes extended leaves of absence during the audit.

➩ Tip Complain. Remember that the interest clock is running until the audit is concluded. Inform the field agent in writing that the extended absences are a problem and request that the audit be concluded. Send a copy of the correspondence to the district director.

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CHAPTER

5

Tax on Unrelated Business Income and Form 990-T THIS CHAPTER DISCUSSES tax on unrelated business income, first presented in questions and answers, then in a series of examples showing taxable and nontaxable income.

Who Must File Form 990-T? Generally, tax-exempt organizations with gross income of $1,000 or more for the year from an unrelated trade or business.

What Form Is Filed? Form 990-T, Exempt Organization Business Income Tax Return, and, generally, a state form.

When Is Form 990-T Due? Form 990-T must be filed by the fifteenth day of the fifth month after the tax year ends.

Are Extensions of Time to File Granted? Corporations can request an automatic extension of six months to file a return by submitting Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return.

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Are 990-T Returns Available for Public Inspection? Although the annual information return filed by an exempt organization (Form 990) is available for public inspection, an exempt organization’s income tax return (Form 990-T) is not available for public inspection. See Chapter 2, “Disclosure of Information.”

What Are the Tax Rates? All organizations subject to the tax on unrelated business income are taxed at prevailing corporate tax rates.

Are Estimated Tax Payments Required? Tax-exempt organizations must make quarterly payments of estimated tax on unrelated business income under the same rules as corporations. Generally, if an organization expects its tax to be $40 or more, estimated tax payments are required.

When Are Estimated Tax Payments Due? Estimated tax payments are due on the fifteenth day of the fourth, sixth, ninth, and tenth months of the tax year.

How Are Estimated Taxes Computed? Tax-exempt corporations should use Form 1120-W, Corporate Estimated Tax, to estimate taxes.

How Are Estimated Tax Payments Made? Organizations should deposit all estimated tax payments with Form 8109, the Federal Tax Deposit Coupon. These deposits must be made with an authorized financial institution or a Federal Reserve bank in accordance with the instructions on the coupon.

How Much of the Final Tax Liability Must Be Paid via Estimated Tax Payments? To avoid an estimated tax penalty, the amount of estimated tax payments required by the organization is 90 percent of the final tax liability.

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Tax on Unrelated Business Income and Form 990-T

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What Is the Penalty for Underpayment of Estimated Taxes? An interest penalty is assessed for underpayment of estimated taxes; it is effective on the due date of the tax. This interest rate is adjusted quarterly by the IRS.

Is There a Penalty for Not Filing Form 990-T? The penalty for not filing Form 990-T by the deadline is 5 percent of the tax due per month, to a maximum of five months, or 25 percent of the tax due.

What Is Unrelated Business Income? Unrelated business income is revenues generated by a tax-exempt organization that possess all three of the following characteristics: 1. The income must be from a trade or business. 2. It must be from a trade or business that is not substantially related to carrying out the exempt purpose for which the organization exists. 3. The trade or business must be regularly carried on.

What Is Considered a Trade or Business? The term trade or business generally includes any activity carried on for the production of income from selling goods or performing services.

What Does “Substantially Related” Mean? To determine whether a business activity is or is not substantially related requires an examination of the relationship between the business activities that generate the particular income in question and the accomplishment of the organization’s exempt purpose. Trade or business is related to exempt purposes, in the statutory sense, only when the conduct of the business activities has a causal relationship to the achievement of exempt purposes (other than through the production of income). The causal relationship must be substantial. The activities that generate the income, to be substantially related, must contribute importantly to the accomplishment of the organization’s exempt purpose. In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function they intend to serve.

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Not-for-Profit Accounting, Tax, and Reporting Requirements For example, if there is income from activities that are in part related to the performance of an organization’s exempt function, but the activities are conducted on a larger scale than is reasonably necessary for the performance of the function, the gross income attributable to that portion of the activities in excess of the needs of the exempt function is income from an unrelated trade or business. This income is not from the production or distribution of goods or the performance of services that contribute importantly to the accomplishment of any exempt purpose of the organization.

What Does “Regularly Carried On” Mean? Business activities of an exempt organization ordinarily will be considered to be regularly carried on if they show a frequency and continuity and are pursued in a manner similar to comparable commercial activities of nonexempt organizations.

Are Any Revenue Sources Specifically Excluded from Unrelated Business Income? The following revenue sources are specifically excluded from tax on unrelated business income: ➢ Dues (excluding associate member dues) ➢ Dividends and interest ➢ Annuities ➢ Royalties ➢ Gains from the disposition of property ➢ Contributions ➢ Proceeds from the sale of goods or services produced in the course of the organization’s exempt function ➢ Income from any trade or business in which substantially all the work is performed by volunteer labor ➢ Any trade or business carried on for the convenience of members ➢ Selling donated merchandise or gifts ➢ Rental of mailing lists by two 501(c)(3) organizations

Are Any Revenue Sources Specifically Included in Unrelated Business Income? The following revenue sources are specifically included in the computation of unrelated business income and are the most common:

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➢ Advertising ➢ Rental income from debt-financed property ➢ Income from controlled organizations

What Does the IRS Consider Advertising Income? Advertising income is revenue generated by an exempt organization from the sale of any paid commercial advertising in its publications, on its Web site, and so forth.

What Does “Debt-Financed Property” Mean? The term debt-financed property means any property that is held to produce income and for which there is an organizational indebtedness at any time during the tax year; this includes real estate and personal property. Tax-exempt organizations that acquire or improve income-producing property with borrowed funds or with existing debt have acquisition indebtedness on the property.

Are Gross Revenues Produced from Debt-Financed Property Taxable in Their Entirety? For each debt-financed property, the unrelated debt-financed income is a percentage of the gross income derived during the tax year from the property. The percentage is the debt/basis percentage. The formula for deriving unrelated debt-financed income is as follows: Average Acquisition Indebtedness ᎏᎏᎏᎏ × Gross Income from Debt-Financed Property Average Adjusted Basis

What Is Income from Controlled Organizations? The exclusion of interest, annuities, royalties, rents, and so forth, does not apply when an exempt organization receives them from a controlled organization. The organization from which the interest, annuities, royalties, and rents are received is called the controlled organization; the exempt organization receiving these amounts is called the controlling organization. If the controlled organization is a stock corporation, control generally means stock ownership of at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock in the corporation.

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Is Tax on Unrelated Business Income Computed on Gross or Net Revenues? This tax is computed on net revenues, not gross. Net income is that derived from any unrelated trade or business, less deductions directly connected with carrying on the trade or business.

Optional Proxy Tax on Lobbying Expenditures If an organization elects to pay the optional proxy tax on lobbying expenditures, the tax is noted on Form 990-T. Write the words “Sec. 6033(e) Proxy Tax” to the left of the entry space. Attach a schedule supporting the computation.

Are There Other Considerations I Should Be Aware of? Other, more complex, issues you should discuss with your tax adviser are as follows: ➢ Trusts ➢ Title-holding corporations ➢ Hospital services ➢ Dual use of assets or facilities ➢ Out-of-state sales ➢ Exploitation of exempt activities ➢ Special rules for social clubs, voluntary employees, beneficiary associations, veterans organizations, and other such groups ➢ Net operating losses ➢ Securities

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Tax on Unrelated Business Income: Examples Taxable? Yes No 1. An agricultural organization whose primary purpose is to promote better conditions for breeders of cattle and to improve the breed generally sells cattle for its members on a commission basis.

x

2. An exempt educational organization regularly sells membership mailing lists to business firms.

x

3. A hospital with exempt status operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. 4. An exempt organization engages primarily in activities that further its exempt purposes. It also owns the publication rights to a book. The publication and distribution of the book do not contribute to the organization’s accomplishing its exempt purposes, except for its need for the income from the sale of the book. The organization exploits the book in a commercial manner. It arranges for printing, distribution, publicity, and advertising in connection with the sale of the book.

x

x

The same organization transfers publication rights to a commercial publisher in return for royalties.

x

5. An exempt vocational school operates a handicraft shop where articles made by students, as part of their regular courses of instruction, are sold. The students are paid a percentage of the sales price. The same organization also sells products produced by former students at home under the direction of the school.

x

x

6. An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. During the summer, the school operates a tennis club open to the general public. Employees of the school conduct the affairs of the club, including collecting membership fees and scheduling court time.

x

7. An exempt organization, organized and operated for the prevention of cruelty to animals, receives income from providing pet boarding and grooming services for the general public.

x

8. A volunteer fire company conducts weekly public dances. The work at the dances is done by unpaid volunteers.

x

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Not-for-Profit Accounting, Tax, and Reporting Requirements Taxable? Yes No

9.

A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholism treatment centers also operates a furniture shop to provide full-time employment for its residents. The profits are applied to the operating costs of the halfway house.

x

10. A business league publishes an annual directory that contains a listing of all its members, their addresses, and their areas of expertise. Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. The directory contains no commercial advertising and is sold only to the organization’s members.

x

11. A business league operates a fringe parking lot and shuttle bus service for a fee.

x

The same organization also operates, as an insubstantial part of its activities, a park-and-shop plan. The plan allows customers of particular merchants to park free at certain parking lots in the area. Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking.

x

12. An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. In addition, the organization has a health club program that its members can join for an annual fee. The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of community members.

x

x

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CHAPTER

6

Wholly Owned Taxable Subsidiaries

IF AN ORGANIZATION has excessive amounts of unrelated business income in relation to its total revenues, it may wish to consider creating a wholly owned taxable subsidiary. However, it is unusual for the IRS to attack the tax-exempt status of a not-forprofit organization on the basis of excessive unrelated income, because the definition is so subjective. Wholly owned taxable subsidiaries should be considered only when necessary; they are not a panacea. Before proceeding with establishing a wholly owned taxable subsidiary, consider the advantages and disadvantages.

Advantages ➢ Isolation of liability—If set up properly, the assets of the parent not-for-profit organization can be protected from creditor problems if legal action is taken against the subsidiary. Be careful, however, of interlocking boards of directors. ➢ Fewer restraints on activities—Often a not-for-profit organization is prohibited from engaging in unrelated revenue activities because of bylaws or action taken by governing bodies. These restraints can be removed by correctly establishing a wholly owned taxable subsidiary.

Disadvantages ➢ Increased administrative costs—Creating a wholly owned taxable subsidiary will result in significantly higher overhead in terms of additional accounting requirements, audit fees, tax returns, and the like.

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Not-for-Profit Accounting, Tax, and Reporting Requirements ➢ Increased IRS audit exposure—Creating a wholly owned taxable subsidiary means creating another taxable entity subject to audit. If the subsidiary is selected for audit by the IRS, the parent not-for-profit organization is likely to be audited because of the relationship, and vice versa. ➢ Loss of related benefits—A wholly owned taxable subsidiary cannot enjoy the benefits that accompany tax-exempt status by law. This means the subsidiary cannot benefit from favorable postal rates, sales tax exemptions, tax-deferred annuities for employees, property tax exemptions, and so forth.

Setting Up a Wholly Owned Taxable Subsidiary If, after careful analysis, it seems in the best interest of the not-for-profit organization to establish a wholly owned taxable subsidiary, this subsidiary should be set up as follows: ➢ Set it up as a separate corporation. In the interests of risk isolation and protection of the parent organization’s assets, the business form of a wholly owned taxable subsidiary should be a corporation, not a partnership. ➢ Set it up so that the parent not-for-profit organization owns 100 percent of the stock of the wholly owned taxable subsidiary. ➢ Avoid interlocking boards of directors. The officers of the parent not-for-profit organization should not be officers of the wholly owned taxable subsidiary. If the two organizations have the same officers, the IRS may take the position that they are in reality one entity, and the corporate veil may be pierced. If the two organizations have the same officers, all of the advantages of setting up a wholly owned taxable subsidiary could be lost in the event of legal action, IRS audits exceptions, and so forth. ➢ Keep business transactions between the parent not-for-profit organization and the wholly owned taxable subsidiary at arm’s length. When the IRS audits a notfor-profit organization, business transactions between the parent and the subsidiary will be closely scrutinized. Neither the not-for-profit organization nor the subsidiary should benefit from the relationship unfairly. For example, ensure that the subsidiary does not use the favorable postal rates enjoyed by the parent and be certain that sales taxes have been paid on purchases by the subsidiary.

Dividends The parent not-for-profit organization benefits financially from the profits of the wholly owned taxable subsidiary through dividends. The subsidiary must maintain

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separate accounting records and file its own tax returns. When the subsidiary earns a profit, taxes will be paid on the profit, and the officers of the wholly owned taxable subsidiary are free to declare an after-tax dividend to be paid to shareholders. In this case, the only shareholder is the parent not-for-profit organization, and the not-forprofit organization will receive the dividend accordingly.

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CHAPTER

7

Restricted-Fund Transactions

FOR NOT-FOR-PROFIT ORGANIZATIONS the accounting treatment and financial statement presentation of restricted funds can be confusing. Restricted-fund accounting is unique to not-for-profit organizations and government, and there are material differences between the two. In fact, there are differences among trade associations, professional associations, charities, hospitals, and educational institutions regarding the accounting treatment of restricted funds. This chapter concentrates on restrictedfund accounting as it applies primarily to professional and trade associations, chambers of commerce, and foundations.

Why the Confusion? The confusion surrounding the accounting treatment and financial statement presentation of restricted funds stems from the fact that before 1994 not-for-profit organizations, unlike commercial businesses, were not bound by required language and reporting requirements promulgated by the American Institute of Certified Public Accountants (AICPA) as necessary for formal financial statement presentations. In response to this confusion, AICPA released Statement of Financial Accounting Standards #117 (SFAS #117), Financial Statements of Not-for-Profit Organizations; SFAS #116, Accounting for Contributions Received and Contributions Made; and SFAS #136, Transfer of Assets to a Not-for-Profit Organization Charitable Trust. See the appendixes for a more detailed discussion of these standards.

The Old Way The following comparison explores the differences between the old and current methods. Before AICPA issued the new standards, restricted funds were included in

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Not-for-Profit Accounting, Tax, and Reporting Requirements the fund balances or members’ equity liability section of not-for-profit organizations’ balance sheets. Four basic funds were used: ➢ The general fund (including board-designated funds) ➢ Current restricted funds ➢ Endowment funds ➢ Fixed-assets funds

The General Fund (Including Board-Designated Funds) The general fund was known by several names, which added to the confusion. It was known as the current unrestricted fund, the current fund, and the current general fund. The term general fund will be used in this discussion. The general fund was used to finance general activities of the not-for-profit organization and was unrestricted in that purpose. The general fund had a subcategory of board-designated funds; these funds were internally restricted to any activity the board saw fit. These internal restrictions had no legal restrictions, and the board was free to terminate or reallocate these funds at any time. The general fund was not protected from creditor action. As a result of the lack of legal restrictions surrounding board-designated funds, and the confusion it caused readers of financial statements, AICPA took the position that these funds should be included in the general fund for financial statement presentation.

Current Restricted Funds As with the general fund, the current restricted fund was also known by other names, including restricted fund, donor-restricted fund, and special-purpose fund. Contributions to current restricted funds were for specific purposes. These were external restrictions imposed by the donor(s) and were legally restricted. In other words, monies expended from these funds could be used only for the specific and express purposes of the fund. To divert these funds to any other activity would have required permission of the donor(s) or legal recourse.

Endowment Funds Endowment funds were also externally restricted, but differed greatly from current restricted funds. Endowment funds generally were assets contributed to not-forprofit organizations on either a term or a permanent basis. The earnings could be used to help offset operating expenses of the association, or restrictions could be made on the earnings, according to the donor’s wishes. When an endowment was a term endowment, the asset either would revert to the donor or the donor’s designee at a certain time, such as death of the donor, or would

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remain with the organization. If the asset remained with the organization, restrictions regarding use of the principal were removed at the end of the term by transferring the principal from the endowment fund to the general fund. When the endowment was permanent, the asset remained with the organization in perpetuity. The principal of perpetual endowments remained whole, and the earnings were used according to the donor’s wishes.

Fixed-Assets Funds As with the general fund and the current restricted fund, fixed-assets funds were known by several names, including building fund, land fund, and equipment fund. Once traditional, the popularity of fixed-assets funds has steadily decreased, for good reasons. These funds confused readers of financial statements, created difficult bookkeeping procedures, and generally served no purpose. They implied that certain assets were available for designated activities only and were not available for the use of the organization as a whole, which was rarely the case.

Financial Statement Presentation The old way of presenting the four restricted funds in the financial statements is shown in Exhibit 7.1.

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EXHIBIT 7.1 Not-for-Profit Organization’s Balance Sheet (Old Way) (Date) Liabilities and Fund Balance Fund Balances: General fund $XXX Current restricted funds XXX Endowment funds XXX Fixed-assets funds XXX $XXX

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It was conceivable for not-for-profit organizations to have several different and distinct funds within each of the four funds. When this occurred, the funds within each fund category were added together and presented in summary on the balance sheet, for a financial statement presentation that was easier to understand and less cumbersome. The detail might have appeared as supplemental information.

The New Way Restricted funds are now accounted for in a net assets section of the Statement of Financial Position (balance sheet). The net assets section has three types of funds: ➢ Unrestricted net assets ➢ Temporarily restricted net assets ➢ Permanently restricted net assets

Unrestricted Net Assets The new unrestricted net assets account is essentially the same as the old general fund account. The account is used to finance the general activities of the not-for-profit organization, which is unrestricted in that purpose. The account is subject to creditor action. Unrestricted net assets can be considered a not-for-profit organization’s net worth (total assets minus total liabilities). In other words, if a not-for-profit organization converted all its assets to cash at book value and paid off all its debts, the remaining funds would be the organization’s net worth, called unrestricted net assets. Another way to view unrestricted net assets is to compare them with retained earnings in the financial statements of commercial organizations. If a not-for-profit organization totaled all the revenues it had received since it was in existence and subtracted from this figure the total expenses for the same period, the resulting profit or loss would be the organization’s unrestricted net assets. The unrestricted net assets account balance changes only once a year, at year-end. At the end of a fiscal year the profit or loss for the year (the increase or decrease in unrestricted net assets) is added to or deducted from the unrestricted net assets carried forward at the beginning of the year. The new unrestricted net assets balance will remain unchanged until the end of the new fiscal year. As in the case of the general fund, unrestricted net assets include board-designated funds. Board-designated funds are internal restrictions only. They are not separately classified on the Statement of Financial Position, and they are not protected from creditor action. Board-designated funds have no accounting significance. Unrestricted net assets are classified as a liability on the financial records because the IRS requires that not-for-profit organizations have a dissolution clause in their bylaws. There are no owners in a not-for-profit organization; if the organization dissolves, its net worth is not distributed to individuals. In the event of a dissolution, the

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Not-for-Profit Accounting, Tax, and Reporting Requirements assets and liabilities of the organization are absorbed by the not-for-profit organization named in the bylaws. A genuine liability does exist, although the probability of a transfer is remote.

Temporarily Restricted Net Assets The new temporarily restricted net assets account is similar to the old current restricted funds. To be considered a temporarily restricted net asset, external restrictions on the use of contributions are imposed by the donors. It is important to classify temporarily restricted net assets correctly, because proper classification and accounting could protect contributions to such accounts from creditor action. An example of temporarily restricted net assets is contributions to a scholarship fund. Donors voluntarily contribute to the fund with the understanding that the monies contributed will be used only to fund scholarships. The donations are not included among the revenues of the organization, but instead are classified as a temporary liability on the Statement of Financial Position until the scholarship is awarded. When the scholarship is awarded, it simply reduces the liability and is not considered an expense of the organization. All temporarily restricted net assets, whatever the number, are added together and presented in summary on the Statement of Financial Position as one figure. It is acceptable to provide detail of the individual funds as a supplemental statement or in the footnotes to the financial statements.

Permanently Restricted Net Assets The best examples of permanently restricted net assets are term or perpetual endowments. An endowment is established when the donor transfers cash (the corpus) or other assets for use by a not-for-profit organization, but the use is restricted to the donor’s wishes. The not-for-profit organization is prohibited from diverting these assets to activities other than those specified by the donor. Although a perpetual endowment remains with the not-for-profit organization in perpetuity, assets transferred to a not-for-profit organization via a term endowment revert to the donor or the donor’s designee at a certain time, such as the death of the donor. It is permissible and common for a term endowment to be transferred to the not-for-profit organization, at which time it is often reclassified as unrestricted. As in the case of temporarily restricted net assets, all permanently restricted net assets are added together and presented in summary on the Statement of Financial Position. Detail usually is provided in a supplemental statement or in the footnotes to the financial statements.

Financial Statement Presentation The new way of presenting restricted funds in the financial statements is shown in Exhibit 7.2.

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EXHIBIT 7.2 Not-for-Profit Organization’s Statement of Financial Position (New Way) Statement of Financial Position (Date) Liabilities and Net Assets Net Assets: Unrestricted net assets $XXX Temporarily restricted net assets XXX Permanently restricted net assets XXX $XXX

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CHAPTER

8

Internal Control

AN EFFECTIVE INTERNAL CONTROL SYSTEM ensures that the organization’s assets are protected and lessens the opportunity for employee dishonesty. Strong internal control procedures are difficult to implement in very small organizations. These organizations should consult with a CPA firm to help them establish controls. Larger organizations should strive for ideal internal control conditions. As part of their annual audit procedures, independent CPA firms must evaluate the effectiveness of the not-for-profit organization’s internal control system and make recommendations for improvement if improvement is needed. However, a not-forprofit organization should set up its own controls over checks received and checks disbursed to strengthen the internal controls suggested at the time of the annual audit. These controls should be documented in the organization’s manual on accounting and financial policies and procedures.

Controls over Checks and Cash Received Use of a bank’s lockbox system is an effective internal control over checks and cash received, because employees have no access at all to original checks and cash. Employee dishonesty is virtually eliminated. A lockbox system is an arrangement between an organization and a bank. The organization uses the bank’s post office box number rather than its own address on all remittance advises, such as dues renewals, invoices, and customer statements. The remittances are sent directly to the bank and deposited by the bank; members and customers are not aware of this procedure, because the remittance envelopes carry the organization’s name, not the bank’s name. When negotiating the lockbox agreement with the bank, instruct the bank that the following steps are necessary:

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Not-for-Profit Accounting, Tax, and Reporting Requirements 1. Photocopies will be made of all checks received. 2. A photocopy of the check will be attached to the remittance advise (dues renewal statements, invoices, customer statements, and so forth). 3. Anything else sent in with the payment, including the envelope (which is often useful for address changes), will be included with the photocopy of the check and the original remittance advice. After depositing the day’s receipts, the bank forwards a validated deposit slip, the check copies, and the remittance documents to the organization. Use of a lockbox also ensures that deposits continue to be made even when employees are absent. If an organization does not have a lockbox arrangement with a bank, controls over checks and cash received at the organization’s office should be implemented and documented in the manual on accounting and financial policies and procedures. Controls over receipts include, at a minimum, the following procedures: 1. Mail is opened by two staff members. If possible, these persons are to be rotated with others on an unpredictable basis. 2. Checks received are endorsed by the staff opening the mail, not by accounting personnel. 3. The endorsement stamp states that the check is for deposit only. The full name of the organization is spelled out (never use acronyms), the bank name is spelled out, and the account number is included. An example of an endorsement stamp is as follows:

FOR DEPOSIT ONLY Organization Name Bank Name Account Number

4. Checks are listed in a log. The log is designed to identify the maker of the check, the check number, the check amount, and an invoice number, if one is used. The log is signed by the persons opening the mail and completing the log. 5. The checks are delivered to accounting personnel, who sign for the checks. One copy of the log is retained in the mail room and another copy in the accounting department, and they are made available for the annual audit. 6. Original checks are never given to the departments responsible for producing the revenues, such as membership, advertising, and conventions. If these departments need the checks for any reason, copies are sufficient.

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Controls over Check Disbursements As in the case of checks received, formal controls over check disbursements should be included in the organization’s manual on accounting and financial policies and procedures. Controls over check disbursements are as follows: 1. An invoice or bill for goods or services is signed by the person who received the goods or services. 2. The invoice is approved for payment by the supervisor of the person who signed for the goods or services received. 3. The check for payment of the invoice is prepared by the accounts payable clerk. Accounting personnel should never be check signers. 4. The check is signed by two check signers not associated with approving the invoice for payment. This procedure of internal control over check disbursements requires collusion among five persons to allow an impropriety to occur. Finally, instruct the bank to address the bank statements to the chief executive officer, not to accounting. The chief executive officer reviews the cancelled checks included with the bank statement and investigates any suspicious payments before forwarding the bank statement to the staff member who prepared the bank reconciliation.

The Internal Control Checklist Controls over checks received and checks disbursed are a good start, but they must be strengthened. Internal controls over other areas—inventory, equipment purchase, and the like—can be achieved by completing an internal control checklist similar to one that would be completed by a CPA firm in conjunction with the annual audit. Completion of the checklist will expose weaknesses so that proper controls and procedures can be formulated. A sample checklist is shown in Exhibit 8.1.

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EXHIBIT 8.1 Internal Control Checklist An effective internal control system is an absolute must if your organization is serious about protecting itself against employee dishonesty. The adequacy of the internal control system in use by your organization can be gauged quickly by answering the following questions:

Yes 1. Are copies of the bank statements forwarded directly to the chief executive officer and are they reviewed before accounting receives the statements? 2. Are two signatures required on every check? 3. Are accounting personnel prohibited from being signers on bank accounts? 4. Are checks received in the mail endorsed by whomever opens the mail before other employees come into contact with checks and is a log of checks received maintained? 5. After the checks have been endorsed, do you prohibit employees other than accounting from coming into contact with original checks? 6. Is the check amount on manual checks protected with a check protector machine? 7. Does your CPA firm evaluate your system of internal controls annually and do you take their suggestions for improvement seriously? 8. Are all employees who handle checks and cash bonded? 9. Do you require employees to take vacation? 10. Is the check supply under lock and key? 11. Do you use high-quality check stock that would be difficult to scan? 12. Does your endorsement stamp spell out the full legal name of your organization and does it also include your bank’s name and your account number? 13. Are two people involved in computing payroll and remitting payroll taxes? 14. Do you have written internal control policies? 15. Do you periodically review the adequacy of your fidelity bond? 16. Does your CPA firm do unannounced checks on bank statement reconciliations? 17. Do you ever check the bank’s records for authorized signers on signature cards? 18. If you have cash transactions, are the policies tested? 19. Do you have an effective computer backup system? 20. Are credit card and loan applications shredded? 21. Do you have an effective audit committee? 22. When key employees terminate, do you have an exit audit? 23. Do you have an insurance committee? 24. Are your controls on credit cards adequate? 25. Do you use a bank’s Positive Pay service? 26. Do you prohibit making checks payable to organizations whose names appear as acronyms?

No

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Internal Control

EXHIBIT 8.1 (Continued) Hopefully, the answers to all of these questions are yes. If not, give serious consideration to changing your procedures where the answers are no. Remember: Fact: In almost every situation where fraud has been discovered, the guilty party is the person above suspicion. Fact: It is becoming increasingly difficult to receive honest references from prior employers. How is fraud detected? During the course of a CPA audit As a result of an internal audit Whistle-blowers Sheer accident

2% 18% 30% 50%

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If You Find Yourself the Victim 1. Investigate first! Never accuse until you know the facts. 2. Call your attorney and CPA for advice immediately before taking action. 3. Contact the insurance company that handles your fidelity bond for direction. 4. Be careful when confronting the suspected person: If there is any possibility of a problem, be sure everyone is protected. Consider having your attorney and CPA with you, but always have a witness, particularly if the situation involves a male confronting a female. It is usually better to confront the person after business hours, when fewer employees are present, to avoid an incident and embarrassment. 5. On advice of counsel, the individual should be either terminated or put on administrative leave. 6. Change computer passwords immediately. 7. Make sure you get such items as keys and credit cards from the suspected person, and consider changing the door locks. 8. Get advice from counsel on how to relate the circumstances to staff and other concerned parties and how to handle references. 9. When it’s all over, work with your CPA to thoroughly evaluate your system of internal controls and correct whatever deficiencies led to the problem.

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CHAPTER

9

The Accounting Policies and Procedures Manual

A NOT-FOR-PROFIT ORGANIZATION’S ACCOUNTING SYSTEM should be designed to be efficient and to meet the organization’s needs. Assuming that an organization has effective budget, accounting, and financial management systems in operation, these systems should be backed up by an official organization manual of accounting and financial policies and procedures. The manual should describe the accounting operation and related policies and procedures in clear, simple, easy-to-understand language. This manual should be presented to the organization’s board of directors for approval and adoption as the official accounting method of the organization. This official manual has several advantages for those involved in any aspect of the organization’s financial management, including the board of directors, the chief executive officer, and the accounting staff. The manual signifies to the board of directors that the accounting department has formal directions regarding exactly how the accounting and financial affairs of the organization are to be handled and how the financial statements are to be presented. The manual should clearly state that the organization’s staff has no authority to deviate from established organization policy in financial matters. It should state that any deviation from established policy without approval is a serious offense, with possible consequences ranging from inconsistent and misleading accounting statements to fraud and other ramifications that would place the organization’s assets at risk. The chief executive officer is somewhat protected from board criticism on the handling of the financial affairs of the organization. The chief executive officer, generally speaking, rarely has a formal accounting or financial background, yet is usually held primarily responsible for fiscal problems. An official manual of accounting and financial policies and procedures allows the chief executive officer to manage the organization with the comfort of knowing its financial affairs are operating in accordance with official board direction. Assuming that the chief executive officer is an

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Not-for-Profit Accounting, Tax, and Reporting Requirements effective manager and the accounting staff is competent, the possibility of typical organization financial management problems is diminished. The official organization manual of accounting and financial policies and procedures assures the financial staff that the financial statements and underlying accounting policies meet with board approval and that the accounting staff will not be held responsible for financial problems if they are operating effectively and carrying out the directions of the board and the chief executive officer. [For additional information, see Model Policies and Procedures for Not-for-Profit Organizations by Edward J. McMillan, John Wiley & Sons, Inc., 2003.]

Preparing the Manual Review of the manual should prepare a person who is unfamiliar with the organization to run the financial operation. The manual first should describe the method of accounting, illustrate the financial statement formats, detail the chart of accounts and the logic of how it was set up, and then describe and define how every account is to be handled from the accounting and policy perspective. Every account, including balance sheet accounts, should be listed and described in detail.

Accounting Descriptions—Examples Account Number: Account Name: Policy:

100-00075 Depreciation It is the policy of the organization to depreciate fixed assets, other than real property and electronic equipment, by the straight-line method over a 10-year period. Real property will be depreciated by the straight-line method over a 30-year period. Electronic equipment will be depreciated by the straight-line method over a 4-year period. Assets will be capitalized in accordance with the organization’s capitalization cutoff point policy.

Account Number: Account Name: Policy:

10-00076 Capitalization Cutoff Points It is the policy of the organization to expense assets in the period purchased if these assets cost $250 or less individually. Assets costing in excess of $250 individually will be capitalized and depreciated in accordance with the organization’s depreciation policies.

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The manual does not end at this point. It also should describe operational policies that affect the accounting operation. The manual should cover many areas of policy, including the following: ➢ Purchase orders ➢ Public access to records ➢ Use of logo on forms ➢ Resale merchandise inventory valuations ➢ Lockbox procedure ➢ Bank reconciliations ➢ Controls over incoming cash/checks ➢ Check disbursements ➢ Petty cash fund disbursements ➢ Investment policies ➢ Prepaid expenses ➢ Accounts payable accounts ➢ Deferred revenues ➢ Travel expenses ➢ Travel advances ➢ Collection procedures ➢ Accounts receivable write-off procedures ➢ Use of time sheets ➢ Discounts on accounts payable ➢ Discounts on accounts receivable ➢ Depreciation ➢ Capitalization cutoff points ➢ Amortization A few areas may be addressed in separate manuals or at a minimum should be included in the manual of accounting and financial policies and procedures. These areas include the following: ➢ A forms manual, which describes all the forms used by the organization, describes how to complete them, and gives other useful information on forms. ➢ A retired forms manual, which contains forms that are no longer used by the organization and the logic and approval process used to change or eliminate the forms.

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Not-for-Profit Accounting, Tax, and Reporting Requirements ➢ A manual on records retention and destruction, which should formally address well-thought-out policies for records retention and destruction. (Old records that are rarely, if ever, used take up valuable space, yet premature destruction of records can be a costly and sometimes embarrassing mistake.) ➢ A year-end manual, which describes in detail what tasks must be completed to ensure that procedures are followed in conjunction with the end of the fiscal year. (Examples include inventory counts, contacting the independent CPA firm, and preparing audit verification letters.) ➢ A data processing manual, which describes data processing procedures, requests for service, maintenance calls, and so forth.

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Policy Descriptions—Examples Subject: Discussion:

Petty Cash Fund Disbursements To reduce check disbursement volume, most organizations maintain a petty cash fund, sometimes called an imprest fund, to pay for small expenditures. The larger the organization, the larger the petty cash fund can be. Typically, petty cash funds range from $250 to $2,000.

Policy:

The procedures for safeguarding, access to, disbursing from, and replenishing of petty cash funds should be straightforward and clear. It is the policy of the organization to maintain a petty cash fund of $500. It is the responsibility of the controller and that person’s designee to ensure that the petty cash fund is under lock and key at all times. Disbursement from the petty cash fund may be only for approved expenditures of $25 or less. A receipt must accompany every disbursement. The receipt must be signed by the person receiving the cash and the person disbursing the cash. The petty cash fund will be replenished as needed and at the end of every month. The replenishment check for the petty cash fund will be made out to the person primarily responsible for maintenance of the fund, with the word agent following his or her name. The expenses will be reviewed and the resulting check will be signed by other responsible parties.

Subject: Discussion:

Discounts on Accounts Receivable It is common for organizations to offer discounts to customers if the customer pays before the debt is due. Typically, the discount is 2 percent if the bill is paid within 10 days.

Policy:

Effective use of a discount policy can improve cash flow, because many organizations are mandated to take advantage of all discounts. It is the policy of the organization to offer customers a 2 percent discount if the invoice is paid within 10 days. An account titled Discounts Taken, a contra-revenue account, will account for these discounts on the financial statements. Example: Merchandise Sales Less Discounts Taken Less Cost of Goods Sold Net Merchandise Sales

$XXX (XXX) (XXX) $XXX

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CHAPTER

10

Tax Implications of Lobbying Expenditures* THE OMNIBUS BUDGET RECONCILIATION ACT of 1993 (H.R. 2264) significantly affects not-for-profit organizations that incur lobbying expenditures. The general intent of the law, which came into effect January 1, 1994, is to eliminate the deductibility of lobbying expenditures for federal income tax purposes. Not-for-profit organizations classified under Section 501(c)(3) of the IRS Code are generally exempt from the law as long as the organization does not engage in lobbying that is of direct financial interest to the donor’s business and the principal purpose of the donation is not to avoid the nondeductibility rule. The law applies only to lobbying expenditures related to federal and state legislation. Lobbying expenditures relating to a county, city, or municipality are not subject to the law.

Accounting Calculation The percentage of dues not deductible by a member for income tax purposes is calculated by dividing the total amount of lobbying expenditures incurred by total dues revenues. For example, if a not-for-profit organization incurs total lobbying expenses of $100,000 and total dues revenues equal $500,000, the nondeductible (disallowable) percentage of dues would be calculated as follows: Lobbying Expenses ÷ Dues Revenue = Disallowable Percentage Example: Lobbying Expenses Dues Revenue

= =

$100,000 $500,000

=

20%

*At the date of publication, new alternatives for computing total lobbying expenses were being proposed.

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Communication to Members It is the responsibility of the not-for-profit organization to report the nondeductible portion of dues payment directly to the member. The statement on nondeductibility of lobbying expenditures could read as follows: The tax deductibility of dues paid to [organization name] as an ordinary and necessary business expense is subject to restrictions imposed as a result of lobbying activities. [Organization name] estimates that the nondeductible portion of your [year] dues is %. In addition, not-for-profit organizations must provide members with a reasonable estimate of the percentage of their dues payment that will be nondeductible for the coming year as part of their dues assessment. The statement could read as follows: As a result of [organization name] lobbying activities, the percentage of dues that may be deducted as an ordinary and necessary business expense is subject to restriction. We estimate the nondeductible percentage of your dues payment to be %.

Safe Harbor The law provides for two safe harbors: ➢ The de minimis rule—If total in-house lobbying expenditures are less than $2,000, the organization is exempt from reporting requirements. ➢ Waiver. If a not-for-profit organization receives 90 percent or more of its dues from individuals or organizations not entitled to deduct their dues as ordinary and necessary business expenses, it is exempt from the nondeductibility rules.

Reporting Requirements Not-for-profit organizations are required to report total lobbying expenditures and total dues revenues on Form 990.

Optional Proxy Tax In lieu of the reporting requirements, not-for-profit organizations can opt to pay a proxy tax. The tax is calculated by multiplying total lobbying expenditures by the applicable tax rate. The tax is reported on Form 990-T. This tax is levied on lobbying expenses up to total dues revenue for the year. The excess is carried forward to the subsequent year.

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CHAPTER

11

Other IRS Issues

NOT-FOR-PROFIT ORGANIZATIONS are held to a higher degree of IRS reporting requirements because of tax-exempt status, favorable postal rates, sales tax exemptions, and other benefits of their status. Five specific IRS areas are unique to not-for-profit organizations: ➢ Unrelated business income tax ➢ Deductibility of lobbying expenditures ➢ Issues regarding employee versus independent-contractor status ➢ Required statement on membership forms ➢ Restrictions on deductions for charitable contributions The issues regarding unrelated business income tax and deductibility of lobbying expenditures are substantial and are explained in other chapters of this book.

Issues Regarding Employee versus Independent-Contractor Status The IRS is encouraging employers, including not-for-profit organizations, to comply with rules and regulations on the proper classification of employees and independent contractors. In the past, employers were generally isolated from IRS penalties for improper classification. Because the independent contractors were issued Form 1099 if they received $600 or more, they were held responsible for improper tax reporting. Abuses by both employers and independent contractors have resulted in payroll tax deficiencies in several areas, including: ➢ Federal income tax ➢ State and local income taxes

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Not-for-Profit Accounting, Tax, and Reporting Requirements ➢ FICA (Social Security) taxes ➢ Medicare taxes ➢ Federal unemployment taxes ➢ State unemployment taxes Payroll tax deficiencies have prompted the IRS to shift the burden of compliance from individuals to employers. Employers now must determine the proper classification of individuals as either employees or independent contractors. To help employers make the classification decision, the IRS issued Revenue Ruling 87-41, a criterion of 20 questions regarding the relationship between the employer and individuals. (See Exhibit 11.1.)

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EXHIBIT 11.1 Revenue Ruling 87-41: 20 Criteria Next to each number, write “E” if employee, “S” if self-employed, or “U” if uncertain. 1. Instructions. A person who is required to comply with instructions about when, where, and how to work is ordinarily an employee. 2. Training. Training of a person by an experienced employee or by other means is a factor of control and indicates that the worker is an employee. 3. Integration. Integration of a person’s services into the business operations generally shows that the person is subject to direction and control and accordingly is an employee. 4. Services rendered personally. If the services must be rendered personally by the person employed, it suggests an employer-employee relationship. Self-employed status is indicated when a person has the right to hire a substitute without the employer’s knowledge. 5. Hiring, supervising, and paying assistants. The hiring, supervising, and paying of assistants by the employer generally indicate that all workers on the job are employees. Self-employed persons generally hire, supervise, and pay their own assistants. 6. Continuing relationship. The existence of a continuing relationship between a worker and the organization for whom the worker performs services is a factor tending to indicate the existence of an employeremployee relationship. 7. Set hours of work. The establishment of set hours of work by the employer is a factor indicating control and, accordingly, the existence of an employer-employee relationship. Self-employed persons are masters of their own time. 8. Full time required. If the worker must devote full time to the business of the employer, he or she ordinarily will be considered an employee. A self-employed person, on the other hand, may choose for whom and when to work. 9. Doing work on employer’s premises. Doing the work on the employer’s premises may indicate that the worker is an employee, especially if the work could be done elsewhere. 10. Order or sequence of work. If a worker must perform services in an order or sequence set by the organization for whom he or she performs services, it indicates that the worker is an employee. 11. Oral or written reports. A requirement that workers submit regular oral or written reports to the employer is indicative of an employer-employee relationship. 12. Payment by hour, week, month. An employee usually is paid by the hour, week, or month, whereas a self-employed person usually is paid by the job on a lump-sum basis (although the lump sum may be paid in intervals in some cases). 13. Payment of business expenses. Payment by the employer of the worker’s business or travel expenses suggests that the worker is an employee. Self-employed persons usually are paid on a job basis and take care of their own business and travel expenses. 14. Furnishing of tools and materials. The furnishing of tools and materials by the employer indicates an employer-employee relationship. Self-employed persons ordinarily provide their own tools and materials. 15. Significant investment. The furnishing of all necessary facilities (equipment and premises) by the employer suggests that the worker is an employee.

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EXHIBIT 11.1 (Continued) 16. Realization of profit or loss. Workers who are in a position to realize a profit or suffer a loss as a result of their services generally are self-employed, while employees ordinarily are not in such a position. 17. Working for more than one firm at a time. A person who works for a number of persons or organizations at the same time is usually self-employed. 18. Making services available to the general public. Workers who make their services available to the general public are usually self-employed. Individuals ordinarily hold their services out to the public by having their own offices and assistants, hanging out a shingle in front of their office, holding a business license, and advertising in newspapers and telephone directories. 19. Right to discharge. The right to discharge is an important factor in indicating that the person possessing the right is an employer. Self-employed persons ordinarily cannot be fired as long as they produce results that measure up to their contract specifications. 20. Right to terminate. An employee ordinarily has the right to end the relationship with the employer at any time he or she wishes without incurring liability. A self-employed person usually agrees to complete a specific job and is responsible for its satisfactory completion or is legally obligated to make good for failure to complete the job. TOTALS: Employee

Self-Employed

Uncertain

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If, after completing the questionnaire, a genuine question exists as to employment status, it is generally best to opt for employee status because monetary punishment for noncompliance can be severe. When an employer has decided a worker qualifies for independent contractor status, it is in the employer’s best interest to document the rationale of the decision. This documentation should be filed permanently with other tax records of the independent contractor and with the examiner in case of an IRS audit. If an employer is found not to be in compliance, the employer will be assessed the full employer’s share of Social Security and Medicare on the total payments, plus penalties and interest. Additionally, it is common for independent contractors who have been incorrectly classified to take action against the employer and recover damages. Damages include all employee benefits that the independent contractor would have received under employment, which may include: ➢ Holiday leave ➢ Vacation leave ➢ Sick leave ➢ Personal leave ➢ Health insurance benefits ➢ Life insurance benefits ➢ Dental insurance benefits ➢ Disability insurance benefits ➢ Pension contributions ➢ Unemployment benefits ➢ Employer’s share of Social Security and Medicare contributions ➢ Child care benefits

Required Statement on Membership Forms Not-for-profit organization membership forms are required to include the following statement: “Dues are not deductible as Charitable Contributions for Income Tax Purposes.” Dues may be considered ordinary and necessary business deductions. This statement corrects the general public’s misunderstanding that dues are deductible as charitable contributions. Only contributions made to 501(c)(3) organizations are deductible.

Restrictions on Deductions for Charitable Contributions Taxpayers who make a separate charitable contribution of $250 or more must obtain written substantiation from the organization for the contribution to qualify as a char-

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Not-for-Profit Accounting, Tax, and Reporting Requirements itable contribution deduction for income tax purposes. The IRS will no longer accept cancelled checks as substantiation. Additionally, organizations that receive quid pro quo contributions in excess of $75 (payments in excess of $75 made partly as a gift and partly as consideration for goods or services) are required to inform contributors in writing of the value of the goods or services furnished and that only the portion exceeding the value is deductible as a charitable contribution.

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CHAPTER

12

IRS Filing Requirements and Forms

MOST ORGANIZATIONS THAT QUALIFY FOR EXEMPTION from income tax are required to report their activities to the IRS.

Which Forms Are Used? Form 990, Return of Organization Exempt from Income Tax, and Form 990-EZ, Short Form Return of Organization Exempt from Income Tax, are used by most tax-exempt organizations. Form 990-EZ can be used if the organization’s total assets are less than $250,000 and the organization’s gross receipts are less than $100,000. If an organization qualifies to file Form 990-EZ, it can still choose to file Form 990.

Other Forms ➢ Form 990-T, Exempt Organization Business Income Tax Return (see Chapter 5 for a discussion on unrelated business income tax) ➢ Form 990-PF, Return of Private Foundation—used by 501(c)(3) organizations classified as private foundations ➢ Form 1120-POL, U.S. Income Tax Return for Certain Political Organizations— used by organizations classified under Internal Revenue Code (IRC) Section 527 ➢ Form 990-BL, Black Lung Benefit Trusts—used by organizations classified under IRC Section 501(c)(21) ➢ Form 990-C, Farmers Cooperative Associations—used by organizations classified under IRC Section 521(a) ➢ Form 1065, Religious and Apostolic Organizations—used by organizations classified under IRC Section 501(d)

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Not-for-Profit Accounting, Tax, and Reporting Requirements ➢ Form 1120-H, Exempt Homeowners Associations—used by organizations classified under IRC Section 528 Because most not-for-profit organizations must complete Form 990 or Form 990-EZ, the following rules apply to organizations required to complete these forms. Information on filing requirements and rules regarding other tax-exempt forms are available in IRS publications.

Who Must File? Qualifying not-for-profit organizations must file Form 990 or Form 990-EZ if their gross receipts are normally more than $25,000. Not-for-profit organizations with gross receipts of $25,000 or less are not required to file.

When Are the Returns Due? Form 990 and Form 990-EZ are due on the fifteenth day of the fifth month following the close of the calendar or fiscal year.

Are Extensions to File Granted? Yes, an extension of time to file is granted by completing Form 2758, Application for Extension of Time to File Certain Excise, Income, Information, and Other Returns. Form 2758 must be filed by the date when Form 990 or Form 990-EZ was due without an extension.

Are There Any Penalties for Filing Late? Yes, a penalty of $10 per day is assessed to organizations filing late. The penalty will not exceed the smaller of $5,000 or 5 percent of the organization’s gross receipts. The penalty is assessed from the due date of the return. Additionally, there are severe penalties, including other fines and imprisonment, for willfully filing fraudulent returns or not filing returns.

Are Form 990 and Form 990-EZ Subject to Public Inspection? Yes, both forms must be made available for public inspection. See Chapter 2 for a discussion of disclosure requirements.

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CHAPTER

13

The Basics of Not-forProfit Accounting and Financial Statements ALTHOUGH NOT-FOR-PROFIT ORGANIZATIONS may prepare their financial statements under Generally Accepted Accounting Principles (GAAP), these statements differ from comparable financial statements prepared for commercial entities. Financial statements prepared by a not-for-profit organization and audited by an independent certified public accountant must be prepared in accordance with the provisions of the accounting standards issued by the Financial Accounting Standards Board (FASB) and distributed by the American Institute of Certified Public Accountants (AICPA). They are: ➢ Statement of Financial Accounting Standards #116 (See Appendix B) ➢ Statement of Financial Accounting Standards #117 (See Appendix A) ➢ Statement of Financial Accounting Standards #124 (See Appendix C) ➢ Statement of Financial Accounting Standards #136 (See Appendix D) Although some of the provisions included in the standards reflect only terminology differences, there are substantive accounting differences.

Key Definitions Nonprofit—This term can cause confusion; a nonprofit organization can make a profit. The term nonprofit is used because when a nonprofit organization operates at a profit, the profit cannot be distributed to the board, influential committee chairs, or members. However, when a commercial organization, a sole proprietorship, a partnership, or a stock corporation operates at a profit, the profit is distributed to the owners, partners, and stockholders accordingly. (Note: To minimize confusion, the term not-for-profit is used in this book.)

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Not-for-Profit Accounting, Tax, and Reporting Requirements Tax-exempt—This term also may lead to confusion because it implies that a taxexempt organization doesn’t pay taxes, when in actuality it does. A typical tax-exempt organization may pay some or all of the following taxes: ➢ Social Security (FICA) tax ➢ Medicare tax ➢ Federal Unemployment (FUTA) tax (Note: 501(c)(3) organizations are exempt from this tax.) ➢ Lobby tax ➢ State sales tax ➢ State unemployment tax ➢ State personal property tax ➢ State real estate tax ➢ Various county and local taxes Tax-exempt means that a not-for-profit organization is exempt from an income tax on its profit if it has one. However, not-for-profit organizations may be required to pay an income tax (unrestricted business income tax) if profit was derived from a source of revenue unrelated to the purpose of the not-for-profit organization.

Typical Financial Statements A not-for-profit organization is responsible for completing its own financial statements monthly. These statements are different from audited financial statements issued by certified public accountants (CPAs), because the CPA-issued statements are subject to the rigorous auditing standards and would include a Statement of Cash Flows and footnotes to the financial statements that are rarely included as a part of internal statements. A not-for-profit organization should prepare the following internal statements: ➢ Statement of Financial Position (balance sheet) ➢ Statement of Activity (income statement)

Statement of Financial Position The following sample and discussion illustrate the various elements of a Statement of Financial Position.

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The Basics of Not-for-Profit Accounting and Financial Statements

1. 2.

Not-for-Profit Organization Statement of Financial Position March 31, 20XX Assets

3. Current Assets: 4. Cash and Cash Equivalents 5. Accounts Receivable 6. Inventory 7. Prepaid Expenses 8. Total Current Assets 9. Plant, Property, and Equipment: Land Building Equipment Subtotal Less Accumulated Depreciation 10. 11. 12. 13. 14.

Net Plant, Property, and Equipment Other Assets: Investments Cash, Temporarily Restricted Cash, Permanently Restricted

$500,000 50,000 60,000 20,000

————

$630,000

$100,000 500,000 300,000 $900,000 (300,000)

————

$400,000 10,000 $100,000

————

Total Assets

$600,000

510,000

————

$1,740,000

————

Liabilities and Net Assets 15. Current Liabilities: 16. Accounts Payable 17. Accrued Payroll and Payroll Taxes 18. Total Current Liabilities

$140,000 120,000

————

19. Long-Term Liabilities: 20. Note Payable Total Long-Term Liabilities

$125,000

21. Other Liabilities: 22. Deferred Income, Dues 23. Deferred Income, Conferences Total Other Liabilities

$175,000 140,000

————

————

$260,000

125,000

315,000

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Not-for-Profit Accounting, Tax, and Reporting Requirements 24. Net Assets: 25. Unrestricted Net Assets 26. Temporarily Restricted Net Assets 27. Permanently Restricted Net Assets

$930,000 10,000 100,000 ———

Total Liabilities and Net Assets

1,040,000 ———— $1,740,000

————

Discussion of Accounts and Terminology: Statement of Financial Position 1. Statement of Financial Position: Unique to not-for-profit organizations. This is simply another term for a balance sheet, a term used by commercial entities. This statement shows the organization’s assets and liabilities against those assets. Assets must always equal liabilities. 2. Date: Date on which data were captured. The Statement of Financial Position continually changes, so it is important to note the date on which the data were captured. In this example, the statement represents a snapshot of the assets and liabilities of the organization at midnight on March 31, 20XX. 3. Current Assets: Includes cash, items that will be converted to cash, and other accounts that the organization benefits from in the current period. 4. Cash and Cash Equivalents: Cash on hand, certificates of deposit, etc. 5. Accounts Receivable: Monies owed to the organization by customers, members, etc. 6. Inventory: Items, such as books, owned by the organization and held for eventual sale. Inventories are recorded in the financial statements at cost to the organization, not at the selling price. 7. Prepaid Expenses: Expenditures made in a current period that the organization will benefit from in some future period. For example, a hotel requires a deposit in March for an event that won’t be held until August. 8. Total Current Assets: The subtotal of the four accounts (cash and cash equivalents, accounts receivable, inventory, and prepaid expenses). It is important to classify any amount properly because this information will be used to compute financial ratios. 9. Plant, Property, and Equipment: Includes cost, accumulated depreciation, and resulting book value of land, buildings, furniture, office equipment, and so forth. All such assets are recorded at original cost, even if the items have appreciated in value, and reduced in value by accumulated depreciation recorded corresponding to those assets. 10. Other Assets: Assets not classified in the other accounts.

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11. Investments: Recorded at market value in accordance with Statement of Financial Accounting Standards #124. 12. Cash, Temporarily Restricted: Cash contributions held in trust by the not-forprofit organization for a temporary period of time. This money eventually will be spent in accordance with the donor’s directions. 13. Cash, Permanently Restricted: Cash contributions held in trust by the not-forprofit organization in perpetuity. The earnings attributed to permanently restricted funds can be either unrestricted or temporarily restricted. This type of asset used to be called an endowment fund. 14. Total Assets: The aggregate net value of all assets held by the organization. 15. Current Liabilities: Amounts owed by the organization and due to be paid within 12 months of the date of the Statement of Financial Position. 16. Accounts Payable: Amounts owed to creditors and vendors, and the currentyear portion of long-term debt. 17. Accrued Payroll and Payroll Taxes: Unpaid wages owed to employees and payroll taxes withheld. 18. Total Current Liabilities: Total of all amounts owed and due within 12 months of the date of the Statement of Financial Position. 19. Long-Term Liabilities: Monies owed by the organization not due to be paid in the current year. 20. Note Payable: Usually secured debt. 21. Other Liabilities: Any liability not classified as current or long-term debt. 22. Deferred Income, Dues: Liability for monies received for dues not yet taken into income. 23. Deferred Income, Conferences: Monies received by exhibitors and others for a future event. This is considered a liability because these amounts would have to be paid back if the conference were not held. 24. Net Assets: The equity portion of the Statement of Financial Position. 25. Unrestricted Net Assets: The net profit or loss the organization has experienced since it has been in existence. Could also be compared to net worth. 26. Temporarily Restricted Net Assets: See #12. 27. Permanently Restricted Net Assets: See #13.

Statement of Activity The following sample and discussion illustrate various elements of a statement of activity.

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Not-for-Profit Accounting, Tax, and Reporting Requirements 1. 2.

Statement of Activity For the Three-Month Period Ended 3/31/XX

3. Revenues: Dues Advertising Book Sales 4. Less Cost of Goods Sold Seminars Magazine Sales Rent Miscellaneous Total Revenue 5. Expenses: Salaries Fringe Benefits Printing Postage Travel Depreciation Total Expenses 6. Increase (Decrease) in Unrestricted Net Assets

$150,000 100,500 30,000 (20,000) 20,000 15,000 30,000 10,000 —— —— $335,500

$120,000 40,000 100,000 25,000 15,000 5,000

————

$305,000 $30,500 — ———

Discussion of Accounts and Terminology: Statement of Activity 1. Statement of Activity: Unique to not-for-profit organizations. It is similar to income statement or statement of profit and loss, terms used by commercial organizations. It simply states the not-for-profit organization’s revenues, expenses, and results of operations. 2. Date: A specific period of time. The Statement of Activity shows the not-for-profit organization’s revenues and expenses for a period of time—in this case year-todate figures for three months. After a year is completed, the result of operations for the year is added to or deducted from unrestricted net assets on the Statement of Financial Condition.

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3. Revenues: Also called income. In accordance with the Statement of Financial Accounting Standards #117, revenues for not-for-profit organizations are always presented as gross, not net. 4. Cost of Goods Sold: Actual cost to the organization for items sold. This account is not included with expenses. 5. Expenses: All expenditures not capitalized, used to pay off debts that apply to the current period. 6. Increase (Decrease) in Unrestricted Net Assets: Not-for-profit terminology for profit or loss.

Accounting Methods Cash Accounting. The cash accounting method is relatively simple and is generally used by new or very small not-for-profit organizations. In cash accounting, revenues are recorded in the Statement of Activity only if the actual cash has been received. Expenses are shown only if the expense actually has been paid. Although cash accounting is easy, the resulting profit or loss shown in the financial statements is often misleading. Note: There is an important exception in cash accounting. Purchases of assets that exceed certain value, and that the organization will use for a period of time, must be capitalized on the Statement of Financial Position and depreciated accordingly. Accrual Accounting. While somewhat more difficult than cash accounting, accrual accounting is more accurate and reliable. In accrual accounting, revenues are shown on the Statement of Activity if they have been earned, even if they haven’t been received. Expenses are shown if the expense has been incurred, even if the expense hasn’t been paid.

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CHAPTER

14

The Basics of Intermediate Sanctions

INTERMEDIATE SANCTIONS LEGISLATION became law as part of the Taxpayer Bill of Rights 2, passed on July 31, 1996. The legislation was prompted by high-profile cases of not-for-profit organization insiders benefiting from unfair and excessive economic advantages as a result of their influential positions. Until the passage of the intermediate sanctions, the IRS’s only recourse when faced with such abuses was to punish the organization by revoking its tax-exempt status. The IRS did not want to do this because it was patently unfair to the innocent beneficiaries of the organization’s noble goals. For example, if the chief staff executive of a worthwhile charity cheated the charity, it would be absurd to revoke the tax-exempt status of the charity, yet the IRS was essentially powerless to punish the individual. All of that has changed with intermediate sanctions. Under the new rules, individuals participating in “excess benefit transactions” are held personally responsible for severe penalties in the form of excise taxes.

Excess Benefits An excess benefit is the excess of the value of services or property received by an individual over the value of the services or property provided by the individual. General examples include the following: ➢ Receiving compensation disproportionate to services provided ➢ Benefiting from loans where the interest rate is below current market ➢ Taking business trips to exotic locations where no business is conducted and expenses are not reimbursed to the organization ➢ Receiving free professional advice and services ➢ Taking part in illegal deferred compensation agreements ➢ Purchasing property when the value is significantly higher than the selling price

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Not-for-Profit Accounting, Tax, and Reporting Requirements Specific examples include the following: ➢ The board members all have full-time jobs separate from the organization. The board meets only four times a year. The board members decide to compensate themselves for their involvement in the amount of $200,000 each at the end of the year. ➢ The chief staff executive purchases a home and mortgages the home through the organization at an interest rate of 2 percent when the prevailing interest rate on settlement date was 8 percent. ➢ The chairman of the board is reimbursed by the organization for expenses incurred for his “business trip” to Tahiti. The chairman traveled first class, stayed in a five-star hotel, and had all expenses, including souvenirs, charged to the organization. No business was conducted. ➢ The treasurer found herself the object of a lawsuit, the circumstances of which had nothing at all to do with the organization’s purpose. She retained an expensive law firm to represent her, and the legal bills were paid by the organization. ➢ The executive vice president benefited from a deferred compensation agreement deferring monies well in excess of legal limitations. Additionally, the money was “hidden” and not shown as an asset of the organization and not at risk as required for nonqualified plans. ➢ The board approves the purchase of company cars for board members’ personal use. At the end of the year they bought the cars from the organization for $1,000 each, although the actual value of each car was $20,000.

Individuals Affected Two types of individuals are affected by the intermediate sanctions: a disqualified person or an organization manager. A disqualified person is: 1. An individual in a position to exercise substantial influence on the affairs of the organization 2. Family members of the above 3. Business entities over which the person has 35 percent or more control 4. Individuals listed in Part V of the organization’s Form 990 (officers, directors, trustees, and key employees) 5. Independent contractors possessing such influence 6. Certain influential members and donors

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An organization manager is an officer, director, or trustee of the organization or other individuals having similar powers.

Computation of the Excise Tax Three types of excise taxes fall under intermediate sanctions: initial, secondary, and a tax on organization managers. The following is an example of how the initial excise tax works: A board member purchases an automobile worth $21,000 from the organization for $1,000. The excise benefit would be $20,000 ($21,000 value less $1,000 paid). The individual will be assessed an initial excise tax equal to 25 percent of the excess benefit, or $5,000 on this car (25 percent × $20,000). Additionally, the organization must be made whole. Not only does the individual have to pay the $5,000 excise tax, he or she also must reimburse the organization the entire $20,000 excess benefit. The following is an example of how the secondary excise tax works: If the individual did not make the organization whole, that individual will be taxed at 200 percent of the value of the excess benefit. In this case, the individual would be assessed an excise tax of $40,000 ($20,000 × 200 percent). The following is an example of how the tax on organization managers works: If organization managers willfully and knowingly do nothing to prevent an excess benefit transaction, knowing it was improper, even if they did not benefit personally, they will be assessed an excise tax of 10 percent of the excess benefit. In this case, they would be assessed $2,000 ($20,000 × 10 percent), limited to $10,000 per transaction.

Organizations Affected Two types of tax-exempt organizations are affected by the intermediate sanctions legislation: 501(c)(3) organizations, with the exception of private foundations, and 501(c)(4) organizations. It is likely that intermediate sanctions will be extended to other not-forprofits, such as 501(c)(6) organizations, although now they are not technically covered.

Conclusion This chapter covers the basics of intermediate sanctions and provides general guidelines. The actual statute and regulations are very complex and should be discussed with the organization’s attorney and CPA.

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CHAPTER

15

The Basics of Filing IRS Form 990

IRS FORM 990 OR FORM 990-EZ, Return of Organizations Exempt from Income Tax, must be filed by any 501(a) organization having normal gross receipts of $25,000 or more, unless the organization is a private foundation and has filed Form 990-PF. Following are some important issues to consider when completing Form 990: Public disclosure As discussed fully in a separate chapter of this manual, Form 990 is open to public inspection. Form 990-EZ The simplified and shortened version of Form 990 may be filed by not-for-profit organizations that normally have less than $100,000 in gross receipts and did not have assets in excess of $250,000 at the end of the taxable year. When is Form 990 due? Form 990 is due by the fifteenth day of the fifth month after the end of the fiscal year. Can extensions be filed? Yes, two extensions of three months each can be obtained by filing Form 2758, for a maximum extension of six months. Are there penalties for not filing? Yes, there is a $20-per-day penalty to a maximum of $10,000 for not-for-profit organizations with less than $1 million in gross receipts and a $100-per-day penalty to a maximum of $50,000 for organizations with more than that amount in gross receipts.

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Specific Instructions Part I—Revenues, Expenses, and Changes in Net Assets or Fund Balances The most important item to consider when completing Part I is that expenses must be allocated into four separate categories: ➢ Program services ➢ Management and general ➢ Fund-raising ➢ Payments to affiliates

Part II—Statement of Functional Expenses The most important aspect of Part II is to itemize the expenses noted by category in Part I by line-item classification, such as salaries, travel, accounting fees, and so forth.

Part III—Statement of Program Service Accomplishments In this statement, the major programs that the not-for-profit organization sponsors are described, and the amounts allocated to the accomplishment of these programs are noted.

Part IV—Balance Sheets Comparative balance sheets (Statements of Financial Position) for the beginning and ending of the organization’s fiscal year must be completed. Organizations that are audited and follow SFAS #117 must indicate so and check the box accordingly. Additionally, if the organization is audited, Parts IV-A and IV-B must be completed, reconciling revenues and expenses noted in the return with audited figures.

Part V—List of Officers, Directors, and Key Employees It is very important to complete this schedule accurately, as this schedule: ➢ is how IRS determines whether compensation is reasonable. ➢ is how contributors and members of the organization make decisions concerning the organization’s prudent use of funds. A complete Part V notes the names and addresses of affected individuals, their titles, how many hours per week are devoted to the position, compensation (if any), contributions to employee benefit plans, deferred compensation, and expense account allowances. Note: If the individuals noted receive compensation from related entities, a box at the end of the schedule must be checked and a reconciling schedule must be attached.

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Part VI—Other Information This section asks several questions concerning the not-for-profit organization’s activities. Several questions, such as those concerning lobbying activities, require that supplemental information be included with the return.

Part VII—Analysis of Income-Producing Activities This section breaks down revenue into two categories: related and unrelated. Briefly, the relationship between these two types of revenues can most easily be described by stating the criteria for unrelated income. To be unrelated income and possibly be subject to unrelated business income tax, the revenue source must answer all three of the following questions affirmatively: 1. Is the revenue source from a trade or business? 2. Is the revenue source regularly carried on? 3. Is the revenue source not substantially related to the tax-exempt purpose of the organization? If the revenue source meets the unrelated criteria, then the revenue must be listed and must include the business code and exclusion code, the details of which are noted in the instructions. Note: Organizations having received a mere $1,000 in gross unrelated revenue must also file IRS Form 990-T.

Part VIII—Relationship of Activities to the Accomplishment of Exempt Purposes In this section, revenue entries in column (E) of Part VII (Related Income) must be explained and referenced by line number. For example, organizations receiving membership dues must note the amount on line 94 and explain the use of the funds accordingly.

Part IX—Information Regarding Taxable Subsidiaries If a not-for-profit organization has a 50 percent or more interest in a taxable organization, Part IX must be completed. Organizations required to complete Part IX must note the name, address, and employer identification number of the subsidiary; the percentage of ownership; the nature of the business conducted by the subsidiary; the total income of the subsidiary; and the subsidiary’s total assets.

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APPENDIX

A

Statement of Financial Accounting Standards #117 Financial Statements of Not-for-Profit Organizations Background Before the adoption of SFAS #117, general-purpose external financial statements provided by not-for-profit organizations were often confusing. This confusion stemmed from a lack of required accounting terminology regarding individual accounts and the lack of required financial statement presentation formats for the old balance sheets and income statements of not-for-profit organizations. Certain types of organizations, specifically universities, hospitals, museums, and the like, often failed to present financial statements that focused on the organization as a whole. Not all organizations included a cash flow statement with the external financial statements. Some organizations prepared their income statements on the functional basis of recording expenses, while others completed their income statements using the natural method. All not-for-profit organizations must comply with the new provisions in SFAS #117. The resulting consistency will benefit everyone connected with the statement, including external users of the statement such as banks and lending institutions, as well as members who have fiduciary financial responsibilities.

Highlights SFAS #117 addresses the following three important areas: ➢ Terminology changes ➢ Complete set of financial statements and important changes therein ➢ The new net assets section on the Statement of Financial Position Reprinted with permission from Not-for-Profit Organization’s Guide to the New Accounting Ruling. Copyright U.S. Chamber of Commerce, September 1996.

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Not-for-Profit Accounting, Tax, and Reporting Requirements The following chart compares previous SFAS #117 terminology and financial statements with the changes in the new standard.

Terminology Changes Pre-SFAS #117

Post-SFAS #117

Balance Sheet Income Statement Profit (Loss) Fund Balances General Fund Balance Endowment Funds Current Restricted Funds Plant Fund Board-Restricted Funds

Statement of Financial Position Statement of Activity Increase (Decrease) in Unrestricted Net Assets Net Assets Unrestricted Net Assets Permanently Restricted Net Assets Temporarily Restricted Net Assets (none) (none)

Changes Under the Complete Set of Financial Statements Balance Sheet Income Statement (Not Required) Accompanying Notes

Statement of Financial Position Statement of Activity Statement of Cash Flows Accompanying Notes

Effective Dates A not-for-profit organization with $5 million in assets and $1 million in expenses is required to comply with the new standards for the organization’s fiscal year that begins after December 15, 1994. An organization with less than $5 million in assets and $1 million in expenses is required to comply with the new standards for the organization’s fiscal year that begins after December 15, 1995.

Scope SFAS #117 applies to the not-for-profit organizations that are addressed in Chapter 1 of this manual. Not-for-profit organizations include, but are not limited to, trade associations, professional associations, charities, foundations, chambers of commerce, boards of trade, hospitals, universities, and museums.

Inconsistencies If an inconsistency arises concerning the provisions of SFAS #117 and prior AICPA pronouncements, including SOP 78-10, the provisions of SFAS #117 will apply and other provisions and prior pronouncements no longer will be acceptable.


Statement of Financial Accounting Standards #117

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SFAS #117 Financial Statements The financial statements of a not-for-profit organization can be broken down into either internal financial statements or external financial statements. Internal financial statements of a not-for-profit organization can be constructed in any manner that meets the needs of the organization. These statements are not required to meet the provisions of SFAS #117 and should instead focus on the managerial needs of the board and upper management. Therefore, SFAS #117 does not address internal financial statements of not-for-profit organizations. External financial statements of a not-for-profit organization must comply with the provisions of SFAS #117 in all respects. External financial statements must be constructed to meet the needs of both management and other parties who have an interest in the organization. The financial statements, including the notes to the financial statements, should provide the following information: ➢ The organization’s assets, liabilities, and net assets included in the Statement of Financial Position ➢ An accounting of changes in the new classes of net assets, including unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets ➢ The Statement of Cash Flows ➢ The Statement of Financial Position that should be constructed to provide equity information ➢ The Statement of Activity that should provide for the service efforts of the organization

Scope of External Financial Statements SFAS #117 requires that a complete set of financial statements for all not-for-profit organizations include the Statement of Financial Position, the Statement of Activity, the Statement of Cash Flows, and accompanying notes. While Generally Accepted Accounting Principles now require not-for-profit organizations to provide information concerning loss contingencies, accounting changes, and so forth, the requirements for not-for-profit external financial statements are generally no more stringent than requirements for commercial activities. SFAS #117 does not specify when or how to measure revenues, expenses, gains, losses, assets, liabilities, and net assets. However, it does discuss how to report these items.


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The Statement of Financial Position In the past it was common for not-for-profit organizations not to report on the organization as a whole. The Statement of Financial Position now must focus on the organization as a whole regarding its total assets and liabilities and net assets. Reporting on segments of organizations alone is no longer permitted. While the Statement of Activity reports activities for a period of time, the Statement of Financial Position will continue to report activities for a moment of time. The statements will provide information that will enable the reader of the financial statements to: ➢ Assess the organization’s ability to continue to provide services, and ➢ Assess the organization’s liquidity.

Aggregating Assets and Liabilities The Statement of Financial Position provisions of SFAS #117 provide that assets and liabilities be organized into reasonably homogeneous groups. Typical homogeneous groups include the following: ➢ Cash and cash equivalents ➢ Marketable securities ➢ Fixed assets and depreciation allowances ➢ Prepaid expenses ➢ Accounts payable ➢ Notes payable However, contrary to commercial organizations, cash or assets that have been received with donor-imposed restrictions on the use of the assets should not be listed with cash or other current assets that are unrestricted. They should instead be recorded near fixed assets on the Statement of Financial Position. Including restricted cash with cash and cash equivalents would distort the organization’s financial ratios, such as the current ratio or the acid test ratio. Liquidity information should be recorded on the Statement of Financial Position by classifying assets according to their proximity to cash and classifying liabilities in accordance with their maturity dates. Assets and liabilities also can be classified as either current or noncurrent. Additionally, the notes of the financial statement should provide more detailed information concerning specific maturity dates, restrictions, or other information that would be useful to the reader of the statements.

The New Net Assets Section The new net assets section in the Statement of Financial Position of a not-for-profit organization now has three classes of accounts:



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➢ Unrestricted net assets ➢ Temporarily restricted net assets ➢ Permanently restricted net assets It is important to emphasize that these are classes of accounts, since a not-forprofit organization could have several types of temporarily and permanently restricted net assets. If a not-for-profit organization has more than one temporarily or permanently restricted net asset activity, the total of all temporarily restricted activities is reported on the Statement of Financial Position as one figure, as is the total of all permanently restricted activities. Information regarding temporarily and permanently restricted net assets, including both the time and the purpose of the restrictions, should be detailed in notes to the financial statements. Permanently restricted net assets are typically broken down into the following two types: ➢ Assets, such as works of art, that were donated with the understanding that they must be preserved and never sold. ➢ Assets donated with the stipulation that they be invested as a source of income. This income could be either temporarily restricted or unrestricted, depending upon the donor’s wishes. Assets that were permanently donated as a source of income are permanent endowment funds. Temporarily restricted net assets typically have one of the following restrictions: ➢ Time restrictions, meaning that the resource could be used only at a particular moment of time or at the passage of time ➢ Purpose restrictions, meaning that the resource could be used only for a specific activity It also is possible to have both time and purpose restrictions. Assets with both time and purpose restrictions are term endowments. Unrestricted net assets are the result of operations of the not-for-profit organization. Such assets are simply revenues earned less expenses incurred since the organization’s inception, and can be compared in some respects to retained earnings of commercial organizations. It is also helpful to consider a not-for-profit organization’s unrestricted net assets as the organization’s net worth, excluding temporarily and permanently restricted net assets. Often a not-for-profit organization has board-designated voluntary restrictions. Board-designated voluntary restrictions—for example, voluntarily earmarking assets for a particular purpose—are included among the unrestricted net assets of the organization. A board is free to designate portions of its funds for certain activities;


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Not-for-Profit Accounting, Tax, and Reporting Requirements however, these are included among unrestricted net assets since they are not bound by purpose or time restrictions by a voluntary donor. The following exhibits illustrate the new Statement of Financial Position format and are presented on a comparable basis. Exhibit A.1 illustrates an organization with no temporarily or permanently restricted net assets. Exhibit A.2 expands the statement to include restricted net assets. When reviewing this statement, please note where cash relating to restricted activities has been placed in proximity to fixed assets.



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EXHIBIT A.1 Not-for-Profit Organization’s Statement of Financial Position December 31, 20XX Assets Cash and Cash Equivalents Accounts Receivable Inventories Prepaid Expenses Contributions Receivable Less Allowance for Uncollectables Fixed Assets Less Accumulated Depreciation Total Assets

Year 2

Year 1

$151,500 9,000 12,000 4,000 11,000 (2,500) 95,000 (25,000) ———— $255,000

$92,000 8,000 70,000 5,000 10,000 (2,000) 90,000 (20,000) ———— $193,000

Liabilities and Net Assets Liabilities: Accounts Payable Notes Payable Deferred Grant Revenues Total Liabilities Net Assets: Unrestricted Net Assets Total Liabilities and Net Assets

$15,000 65,000 40,000 $120,000 $135,000

$13,000 70,000 50,000 $133,000 $60,000

————

————

$255,000

$193,000


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EXHIBIT A.2 Not-for-Profit Organization’s Statement of Financial Position December 31, Year 2 and Year 1 Assets Cash and Cash Equivalents Accounts Receivable Inventories Prepaid Expenses Contributions Receivable Less Allowance for Uncollectables Assets Restricted to Future Investment in Equipment Fixed Assets Less Accumulated Depreciation Assets with Permanent Restrictions Total assets

Year 2

Year 1

$50,000 9,000 12,000 4,000 11,000 (2,500) 13,000 95,000 (25,000) 25,000 ———— $191,500

$35,000 8,000 10,000 5,000 10,000 (2,000) 13,000 95,000 (20,000) 25,000 ———— $174,000

Liabilities and Net Assets Accounts Payable Notes Payable Deferred Grant Revenues Total Liabilities

$15,000 65,000 40,000 ———— $120,000

$13,000 70,000 50,000 ———— $133,000

$33,500 13,000 25,000 ———— $71,500

$16,000

Net Assets: Unrestricted Temporarily Restricted Permanently Restricted Total Net Assets Total Liabilities and Net Assets:

$191,500

25,000 $41,000

———— $174,000



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The Statement of Activities It is important to remember that the new Statement of Activities for not-for-profit organizations must focus on the organization as a whole. The statement should be designed to provide readers information concerning: ➢ The effects of transactions on the three classes of net assets ➢ Any relationships that exist between or among these transactions and how they affect each other ➢ How the organization uses its resources to provide and continue programs and services for its constituencies The Statement of Activities and accompanying notes should enable the reader of the financial statement to: ➢ Evaluate the organization’s performance during the period ➢ Assess the organization’s service efforts and its ability to continue services ➢ Assess how the organization’s management has discharged its responsibilities accordingly

Reporting Changes in the Three Classes of Net Assets The new Statement of Activities should be designed to report on all the changes for all three of the new classes of net assets: unrestricted, temporarily restricted, and permanently restricted net assets. Revenues, expenses, gains, losses, and reclassification information also should be aggregated into items that possess similar characteristics, since they are reasonably homogeneous groups.

Reporting Revenues, Expenses, Gains, and Losses among the New Classes of Net Assets in the Statement of Activity A controversial aspect of SFAS #117 is the requirement that the Statement of Activities report all expenses as expenses relating to unrestricted net assets. This requirement can best be explained by using an example of a not-for-profit organization that receives contributions to a scholarship fund. A scholarship fund would clearly be included among temporarily restricted net assets. Contributions received from donors for the purpose of awarding scholarships would increase this particular temporarily restricted net asset class of account. When the scholarship is subsequently awarded, the expense would be recorded among the unrestricted activities of the organization on its Statement of Activity. To offset this expense, monies may be transferred or reclassified from temporarily restricted net assets to unrestricted net assets accordingly to balance the financial statements. This reclassification revenue account would typically be called “net assets released from restrictions.”


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Not-for-Profit Accounting, Tax, and Reporting Requirements Income or gains credited to temporarily restricted net assets or permanently restricted net assets will typically increase the value of that particular class of net assets. When a corresponding expenditure is made that relates to the particular class of asset, the expenditure will be listed among the expenses of the unrestricted class. Again, revenues must be reclassified from a temporarily or permanently restricted account to the unrestricted accounts accordingly. Typically, the recording of contributions to temporarily or permanently restricted net asset classes of accounts is very clear, as is the use of earnings or gains on the account. Donor-restricted contributions are reported as restricted revenues or gains; the contributions will increase temporarily or permanently restricted net assets accordingly. Gains and losses on investments, and other assets included in temporarily or permanently restricted net assets, will be recorded as increases in unrestricted net assets, unless it is clear that the use of the gain or loss is restricted for that specific asset and/or for a specific period of time. Reporting revenues, expenses, gains, and losses among the three new classes of net assets does not preclude operating revenues versus nonoperating revenues, or earned revenues versus unearned revenues, and so forth. SFAS #117 neither encourages nor discourages this type of reporting.

Reporting at Gross SFAS #117 also requires that the not-for-profit organization report revenues and expenses at gross rather than at net. For example, an organization is not permitted to report net publication sales. In this case, gross publication sales and associated cost of goods sold must be reported. However, fees such as custodial and advisor services can, in fact, be deducted from the gross before they are reported. Gains and losses from incidental transactions also can be reported at net, as these transactions are typically beyond the control of the organization. For example, if an organization sells an asset that is not replaced, the net gain or loss from the sale or transaction can be reported, and gross reporting is not required.

Natural and Functional Reporting Requirements To enable a not-for-profit organization to assess its use of its resources, SFAS #117 requires all not-for-profit organizations to report their activities on a functional basis that includes program services and supporting activities. Only voluntary health and welfare organizations must use the natural method of reporting information. Voluntary health and welfare organizations must report on both the functional and the natural basis of reporting. Natural-presentation financial statements provide information



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concerning salaries, rent, and other line items, instead of grouping them into program services and the like. Not-for-profit organizations other than health and welfare organizations are encouraged, but not required, to report information on both the functional and the natural basis in a matrix format.

Program Services and Supporting Activities Program services are those activities that fulfill the organization’s mission. For example, membership organizations provide benefits to its members such as producing magazines and newsletters, and the like. Other program services may include providing public educational services or medical research. Typical supporting activities would include administrative functions of which the recipient of the program services is only incidentally aware, such as the running of a warehouse operation or the accounting function of an organization. The following three examples illustrate how a not-for-profit organization that has no temporary or permanently restricted net asset classes of accounts may present a Statement of Activities and changes in unrestricted net assets by using each of the following: 1. Functional basis (Exhibit A.4) 2. Natural basis (Exhibit A.5) 3. Functional and natural matrix (Exhibit A.6) When reviewing the three Statements of Activity in the exhibits, note how the change in unrestricted net assets relates to the final unrestricted net assets balance in the Statement of Financial Position (Exhibit A.3).


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EXHIBIT A.3 Not-for-Profit Organization’s Statement of Financial Position December 31, 20XX Assets Cash and Cash Equivalents Accounts Receivable Inventories Prepaid Expenses Contributions Receivable Less Allowance for Uncollectables Fixed Assets Less Accumulated Depreciation Total Assets

Year 2

Year 1

$151,500 9,000 12,000 4,000 11,000 (2,500) 95,000 (25,000) ———— $255,000

$92,000 8,000 70,000 5,000 10,000 (2,000) 90,000 (20,000) ———— $193,000

Liabilities and Net Assets Liabilities: Accounts Payable Notes Payable Deferred Grant Revenues Total Liabilities Net Assets: Unrestricted Net Assets Total Liabilities and Net Assets

$15,000 65,000 40,000 $120,000

$135,000

$13,000 70,000 50,000 $133,000

$60,000

————

————

$255,000

$193,000



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Functional Method (Exhibit A.4) This method is in accordance with SFAS #117 in the following ways: ➢ Revenues are presented at gross. ➢ Expenses are classified as either program or supporting activities on a functional basis. ➢ Changes in unrestricted net assets are clearly presented. The disadvantage of this method is that expense detail by line item (salaries, rent, etc.) is not presented on the statements.


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EXHIBIT A.4 Not-for-Profit Organization’s Statement of Activities and Changes in Unrestricted Net Assets (Functional Basis) Year Ended December 31, 20XX Unrestricted Revenues: Dues Contributions Interest Total Unrestricted Revenues

$500,000 200,000 50,000 ———— $750,000

Expenses: Program A Program B Program C Management & General Total Expenses

$125,000 150,000 250,000 150,000 ———— $675,000

Increase in Unrestricted Net Assets Unrestricted Net Assets, Beginning of Year Unrestricted Net Assets, End of Year

$75,000 60,000 ———— $135,000



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Natural Basis (Exhibit A.5) This method alone is not in accordance with SFAS #117, in that not-for-profit organizations have the options to present the Statement of Activities on a functional basis. The natural method does not break down revenues into program and supporting activities. Voluntary health and welfare organizations now must present their Statement of Activity on both the functional and the natural basis. Considering this, a voluntary health and welfare organization’s financial statements could include a Statement of Activity combining Exhibits A.4 and A.5, or as a functional and natural matrix as illustrated on Exhibit A.6.


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EXHIBIT A.5 Not-for-Profit Organization’s Statement of Activities and Changes in Unrestricted Net Assets (Natural Basis) Year Ended December 31, 20XX Unrestricted Revenues: Dues Contributions Interest Total Unrestricted Revenues Expenses: Salaries Fringe Benefits Printing Postage Rent Travel Total Expenses Increase in Unrestricted Net Assets Unrestricted Net Assets, Beginning of Year Unrestricted Net Assets, End of Year

$500,000 200,000 50,000 ———— $750,000 $200,000 40,000 150,000 75,000 125,000 85,000 ———— $675,000 $75,000 $60,000 ———— $135,000



117

Functional and Natural Matrix (Exhibit A.6) This method is in accordance with SFAS #117 standards for all not-for-profit organizations in the following ways: ➢ Revenues are presented at gross. ➢ Expenses are classified as either program or supporting activities. ➢ Changes in unrestricted net assets are clearly presented. After a review of this statement, the reader should realize why SFAS #117 encourages all not-for-profit organizations to prepare their Statement of Activity using both the natural and the functional methods. This method has the advantage of presenting more detailed information in an easy-to-understand matrix format that meets the standards of SFAS #117. Remember, while all not-for-profit organizations must present their Statement of Activities on a functional basis, only voluntary health and welfare organizations are required to present both the functional and natural methods. Not-for-profit organizations, however, are encouraged to use both methods.


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EXHIBIT A.6 Not-for-Profit Organization’s Statement of Activities and Changes in Unrestricted Net Assets (Functional and Natural Matrix) Year Ended December 31, 20XX

Unrestricted Revenues: Dues Contributions Interest Total Unrestricted Revenues Expenses: Salaries Fringe Benefits Printing Postage Rent Travel Total Expenses Increase (Decrease) in Unrestricted Net Assets Unrestricted Net Assets, Beginning of Year Unrestricted Net Assets, End of Year

Program A

Program B

Program C

Management & General

$90,000

$175,000 200,000

$125,000

$110,000

Total

50,000

$500,000 200,000 50,000

$90,000

$375,000

$125,000

$160,000

$750,000

$36,000 7,000 28,000 15,000 20,000 19,000 $125,000

$70,000 14,000 20,000 14,000 20,000 12,000 $150,000

$50,000 10,000 60,000 36,000 50,000 44,000 $250,000

$44,000 9,000 42,000 10,000 35,000 10,000 $150,000

$200,000 40,000 150,000 75,000 125,000 85,000 $675,000

$(35,000)

$225,000

$(125,000)

$10,000

$75,000 $60,000 $135,000



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Now, expand the statements to include activity in temporarily and permanently restricted net assets classes of accounts in addition to the information already presented. Remember, as part of SFAS #117, all expenses are recorded in the unrestricted net assets class of accounts. This will require transferring revenues from the temporarily and permanently restricted classes of accounts to the unrestricted class to offset the associated expenses. Note how changes in the various net assets accounts relate to the final balances of these accounts on the Statement of Financial Position (Exhibit A.7). The Statement of Activity (Exhibit A.8, Format 1) has reported unrestricted activity on a functional basis, and it includes activity for both restricted classes of net assets by representing increases or decreases in the three new assets classes of accounts. Only the total of all three classes of net assets balances are presented, and the detail of the individual account balance appears only on the Statement of Financial Position (Exhibit A.7).


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EXHIBIT A.7 Not-for-Profit Organization’s Statement of Financial Position December 31, 20XX Assets Year 2 Cash and Cash Equivalents Accounts Receivable Inventories Prepaid Expenses Contributions Receivable Less Allowance for Uncollectables Assets restricted to investment in equipment and corpus of permanently restricted net assets Fixed Assets Less Accumulated Depreciation Total Assets

Year 1

$151,500 9,000 12,000 4,000 11,000 (2,500)

$92,000 8,000 10,000 5,000 10,000 (2,000)

235,000 95,000 (25,000)

210,000 90,000 (20,000)

———— $490,000

———— $403,000

Liabilities and Net Assets Accounts Payable Notes Payable Deferred Grant Revenues Total Liabilities Net Assets: Unrestricted Temporarily Restricted Permanently Restricted Total Net Assets Total Liabilities and Net Assets

$15,000 65,000 40,000 $120,000

$13,000 70,000 50,000 $133,000

$135,000 130,000 105,000 $370,000 ———— $490,000

$60,000 110,000 100,000 $270,000 ———— $403,000



EXHIBIT A.8, FORMAT 1 Not-for-Profit Organization’s Statement of Activities Year Ended December 31, 20XX Change in Unrestricted Net Assets: Revenues: Dues Contributions Interest Total Unrestricted Revenues

$500,000 200,000 50,000 ———— $750,000

Net Assets Released from Restrictions: Expiration of Time Restrictions Satisfaction of Program Restrictions Total Net Assets Released from Restrictions Total Unrestricted Revenues and Other Support

$40,000 50,000 ———— $90,000 $840,000

Expenses: Program A Program B Program C Program D Program E Management & General Total Expenses

$125,000 150,000 250,000 40,000 50,000 150,000 ———— $765,000

Increase in Unrestricted Net Assets

$75,000

Changes in Temporarily Restricted Net Assets: Contributions Net Assets Released from Restrictions Increase in Temporarily Restricted Net Assets

$60,000 (40,000) ———— $20,000

Changes in Permanently Restricted Net Assets: Increase from Long-Term Investments Net Assets Released from Restrictions Increase in Permanently Restricted Net Assets

$55,000 (50,000) ———— $5,000

Total Increase in Net Assets Net Assets, Beginning of Year Net Assets, End of Year

$100,000 270,000 $370,000

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Not-for-Profit Accounting, Tax, and Reporting Requirements The Statement of Activity (Exhibit A.9, Format 2) presents the same information in a matrix rather than a columnar format. Note that the final balances for each class of account are illustrated with the final balances noted on the Statement of Financial Position (Exhibit A.7).



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EXHIBIT A.9, FORMAT 2 Not-for-Profit Organization’s Statement of Activities (with Activity in the Unrestricted, Temporarily Restricted, and Permanently Restricted Classes of Accounts) Year Ended December 31, 20XX

Unrestricted Revenues: Dues Contributions Interest Income from Long-Term Investments Net Assets Released from Restrictions: Expiration of Time Restrictions Satisfaction of Program Restrictions Total Revenues Expenses: Program A Program B Program C Program D Program E Management & General Total Expenses Changes in Net Assets Net Assets, Beginning of Year Net Assets, End of Year

$500,000 200,000 50,000

40,000 50,000

———— $840,000

$125,000 150,000 250,000 40,000 50,000 150,000 ———— $765,000 $75,000 $60,000 $135,000

Temporarily Restricted

Permanently Restricted

$60,000 $55,000

Total $500,000 260,000 105,000

(40,000)

———— $20,000

$20,000 $110,000 $130,000

(50,000)

————

————

$5,000 $100,000 $105,000

$125,000 150,000 250,000 40,000 50,000 150,000 ———— $765,000 $100,000 $270,000 $370,000

$5,000

$865,000


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Not-for-Profit Accounting, Tax, and Reporting Requirements Another material change in SFAS #117 that affects the audited statements of a not-for-profit organization is the requirement that a full set of audited financial statements now include a Statement of Cash Flows. Essentially, SFAS #117 amended SFAS #95 to extend its provisions to include not-for-profit organizations. As in the case for a commercial organization, the Statement of Cash Flows for a not-for-profit organization will consist of the following three categories, which will be on the face of the statement, if applicable: ➢ Net cash used by operating activities ➢ Net cash used by investing activities ➢ Net cash used by financing activities The Statement of Cash Flows can be prepared by using the direct or the indirect method.

The Direct Method The direct method for preparing a Statement of Cash Flows reports gross receipts and gross expenses by category and nets them out to arrive at the net cash flow from operations. The direct method is preferred but not required. The direct method is illustrated in Exhibit A.10.



EXHIBIT A.10 Not-for-Profit Organization’s Statement of Cash Flows (Direct Method) Year Ended December 31, 20XX Cash flows from operations: Cash received for services Cash received from contributions Cash collected on receivables Interest received Other receipts Cash expenses paid Net cash used by operations

$500,000 50,000 40,000 40,000 30,000 (700,000) ———— (40,000)

Cash flows from investing activities: Purchase of equipment Purchase of investments Net cash used by investing activities

(150,000) (75,000) ———— (225,000)

Cash flows from financing activities: Restricted contributions: Investment in endowment Other financial activities: Payments on long-term debt Net cash used by financing activities Net decrease in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year Reconciliation of changes in net assets to net cash: Operating activities: Change in net assets Adjustments to reconcile: Depreciation Increase in accounts receivable Restricted contributions for long-term investments Decrease in inventories Increase in accounts payable Net cash used by operations (Note: This statement is unrelated to financial statements previously presented.)

110,000 (75,000)

———— 35,000 ———— (230,000) 365,000 $135,000

$90,000 25,000 (125,000) (80,000) 20,000 30,000

———— $(40,000)

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The Indirect Method The indirect method for preparing a Statement of Cash Flows starts with the total change in net assets from the Statement of Activities. Adjustments are then made for items that do not have an effect on cash, such as depreciation, changes in related asset and liability accounts, and reversal of year-end actuals. The indirect method is illustrated in Exhibit A.11.



EXHIBIT A.11 Not-for-Profit Organization’s Statement of Cash Flows (Indirect Method) Year Ended December 31, 20XX Cash flows from operations: Change in net assets Adjustments to reconcile: Depreciation Increase in accounts receivable Restricted contributions for long-term investments Decrease in inventories Increase in accounts payable Net cash used by operations

(80,000) 20,000 30,000 ———— (40,000)

Cash flows from investing activities: Purchase of equipment Purchase of investments Net cash used by investing activities

(150,000) (75,000) ———— (225,000)

Cash flows from financing activities Restricted contributions: Investment in endowment Other financial activities: Payments on long-term debt Net cash used by financing activities Net decrease in cash and equivalents Cash and equivalents, beginning of year Cash and equivalents, end of year

$90,000 25,000 (125,000)

110,000 (75,000)

————

35,000 (230,000) 365,000 ———— $135,000

————

(Note: This statement is unrelated to financial statements previously presented.)

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The Statement of Cash Flows While not preferred, use of the indirect method is acceptable.

Comparative Financial Statements SFAS #117 does not require that a complete set of audited financial statements include prior-year comparative information; however, including this information is encouraged.

The Statement of Changes in Net Assets As previously noted, a complete set of financial statements for not-for-profit organizations includes the following: ➢ The Statement of Financial Position ➢ The Statement of Activities ➢ The Statement of Cash Flows ➢ Accompanying notes While not required, a set of financial statements of not-for-profit organizations often includes a statement of changes in fund balance. Many organizations may want to include the replacement for the statement of changes in fund balance, now called the Statement of Changes in Net Assets. While encouraged, the inclusion of this statement is not required. This statement may be presented in either a vertical format or a matrix format, illustrated in Exhibits A.12 and A.13, respectively.



EXHIBIT A.12 Not-for-Profit Organization’s Statement of Changes in Net Assets (Vertical Method) Year Ended December 31, 20XX Unrestricted Net Assets: Total Unrestricted Revenues Net Assets Released from Restrictions Total Unrestricted Expenses Increase in Unrestricted Net Assets

$750,000 90,000 (765,000) ———— $75,000

Temporarily Restricted Net Assets: Contributions Net Assets Released from Restrictions Increase in Temporarily Restricted Net Assets

$65,000 (40,000) ———— $20,000

Permanently Restricted Net Assets: Income from Long-Term Investments Net Assets Released from Restrictions Increase in Permanently Restricted Net Assets

$55,000 (50,000) ———— $5,000

Total Increase in Net Assets Net Assets, Beginning of Year Net Assets, End of Year

$100,000 270,000 ———— $370,000

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EXHIBIT A.13 Not-for-Profit Organization’s Statement of Changes in Net Assets (Matrix Method) Year Ended December 31, 20XX

Unrestricted Revenues: Total Unrestricted Revenues Contributions Income from Long-Term Investments Net Assets Released from Restrictions Total Revenues Expenses: Total Unrestricted Expenses Change in Net Assets Net Assets at Beginning of Year Net Assets at End of Year

Temporarily Restricted

Permanently Restricted

$750,000 $60,000 90,000 ———— $840,000

765,000 $75,000

———— 60,000

(40,000) ———— $20,000

$20,000 110,000

$55,000 (50,000) ———— $5,000

$5,000 100,000

Total

$750,000 60,000 55,000

————

$865,000

765,000 $100,000

————

270,000

————

————

————

————

$135,000

$130,000

$105,000

$370,000



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Notes to Financial Statements SFAS #117 requires that the notes to the financial statements disclose relevant information in the following four areas: ➢ Policy disclosures (Note A) ➢ Purposes and amounts included in the temporarily restricted net assets class of accounts (Note B) ➢ Purposes and amounts included in the permanently restricted net assets class of accounts (Note C) ➢ Statement of functional expenses (voluntary health and welfare organizations) (Note D)

Note A Contributions of cash or other assets, the uses of which are restricted by donors and limited by the organization, are treated as restricted support, are included in the temporarily restricted net assets or permanently restricted net assets classes of accounts, are reclassified to the unrestricted net assets class, and are reported as net assets released from restrictions. All of the organization’s expenses, including expenses relating to assets previously included among the temporarily restricted net assets or permanently restricted net assets classes of accounts, are decreases in unrestricted net assets.

Note B Temporarily restricted net assets are to be used for the following purposes: Program D: Equipment purchases Seminars

$100,000 30,000 $130,000

Note C Permanently restricted net assets are to be used for the following purposes: Investments in perpetuity, earnings from which are to be used to support Program E: Scholarships

$105,000


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Note D Expenses of the organization for program and support activities were as follows: Program

Salaries Fringe benefits Supplies Travel Rent Depreciation Printing Total expenses

2,000

3 $30,000 3,000 5,000 3,000 2,000

Management & General $15,000 1,500 6,000 6,000 3,000 10,000

7,000 ———— $38,500

4,000 ———— $47,000

———— $41,500

1 $20,000 2,000 3,000 7,000 2,000

2 $25,000 2,500 2,000

6,000 ———— $40,000

Fund-Raising $20,000 2,000 3,000 3,000 16,000 ———— $44,000

Total $110,000 11,000 19,000 16,000 12,000 10,000 33,000 ———— $211,000

(Note: This note is unrelated to the financial statements previously presented.)

Other notes to the financial statements that are encouraged, but not required, include: ➢ A detail of assets reclassified to the unrestricted net asset class due to the expiration of time restrictions or the accomplishment of purpose restrictions ➢ Investment gain or loss detail


APPENDIX

B

Statement of Financial Accounting Standards #116 Accounting for Contributions Received and Contributions Made Background The purpose of SFAS #116 is to eliminate the confusion surrounding contributions of cash and other items, including contributed collections and contributed services. The provisions of SFAS #116 that concern when contributions are recognized in the organization’s respective financial statements extend to both commercial and not-forprofit organizations. While the provisions of SFAS #116 extend to both not-for-profit and commercial organizations, it is important to remember that Section 501(c)(3) organizations are particularly affected because only contributions to 501(c)(3) organizations are deductible by the donor. Please note, however, that the standard does not address the tax ramifications of making contributions to not-for-profit organizations.

Highlights SFAS #116 addresses the following three important areas: ➢ When and how to recognize contributions in the financial statements ➢ Rules for classifying contributions as unrestricted support, temporarily restricted support, or permanently restricted support ➢ Rules for the recognition of contributed services into the financial statements of not-for-profit organizations

Reprinted with permission from Not-for-Profit Organization’s Guide to the New Accounting Ruling. Copyright U.S. Chamber of Commerce, September 1996.

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Effective Dates A not-for-profit organization with $5 million in assets and $1 million in expenses must comply with the new standards for the organization’s fiscal year that begins after December 15, 1994. An organization with less than $5 million in assets and $1 million in expenses is required to comply with the new standards for the organization’s fiscal year that begins after December 15, 1995.

Scope SFAS #116 applies to all not-for-profit organizations addressed in Chapter 1 of this manual. Not-for-profit organizations include, but are not limited to, trade associations, professional associations, charities, foundations, chambers of commerce, boards of trade, hospitals, universities, and museums. The provisions of SFAS #116 concerning when and how to report donations in financial statements also apply to commercial organizations. Provisions of SFAS #116 apply to voluntary contributions of cash or other assets and now include promises to give. This statement does not apply to transactions in which both the receiving organization and the donating organization essentially receive value. This statement also does not apply when the receiving organization is merely acting as an agent, trustee, or intermediary instead of as the ultimate receiving organization. It is acceptable to use terms such as donation or gift instead of the word contribution, but terminology such as grant, award, appropriation, and so forth, is to be avoided because these terms imply that the receiving organization will give value.

Inconsistencies If an inconsistency arises concerning the provisions of SFAS #116 and prior AICPA pronouncements, including SOP 78-10, the provisions of SFAS #116 will apply, and other provisions and prior pronouncements are no longer acceptable.

Definitions A contribution is an unconditional transfer of cash or other assets to an entity, or a settlement or cancellation of the entity’s liabilities in a voluntary nonreciprocal manner by another entity acting other than as an owner. Other assets may include securities, land, buildings, use of facilities, materials, supplies, intangible assets, services, and unconditional promises to give at some point in the future.



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A donor-imposed condition is a transfer of assets or a promise to give that specifies that a future and uncertain event whose occurrence or failure to occur gives the promisor the right of return of the assets transferred or releases the promisor from its obligations to transfer the asset. A donor-imposed restriction is a limitation on the use of contributed assets. It specifies a use that is more specific than the broad limits resulting from the nature of the organization, the environment in which it operates, and the purpose specified in its articles of incorporation, bylaws, or comparable documents. A promise to give is a written or oral agreement to contribute cash or other assets to another entity. For the contribution to be recognized in the financial statement, there must be sufficient evidence in the form of verifiable documentation that a promise was made and received. A communication that does not clearly indicate that it is a promise and that indicates an unconditional intention to give that is legally enforceable is considered an unconditional promise to give. We will now discuss the important details included in SFAS #116.

Recognition of Contributions Contributions will now be recognized as revenue in the period received or as an asset, a decrease of liabilities, or an expense, depending on the form of the benefit received. Contributions will also be measured at their fair values. Additionally, contributions received by a not-for-profit organization will now be reported as either restricted support or unrestricted support, and will be appropriately classified in the new net assets section of the Statement of Financial Position.

Recognition of Contributed Services One of the more controversial aspects of SFAS #116 is the requirement that the contribution of services be recognized in the financial statements of a not-for-profit organization if one of two circumstances is recognized: 1. The contributed services create or enhance a nonfinancial asset, or 2. The contributed services would have required skills that the organization would have had to pay for if the services had not been donated. The statement provides that these services include but not be limited to services provided by accountants, architects, carpenters, doctors, electricians, lawyers, nurses, plumbers, teachers, or other professionals or craftsmen.


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Example 1 A not-for-profit organization embarks upon an accreditation program to accredit its member institutions. Accountants, attorneys, and other professionals volunteered their time to accomplish the accreditation program, and the value of their time must be included in the financial statements. Typically, these professionals would provide the organization with a statement concerning the value of their time, and that statement would be the basis for the inclusion of the contributed services. In this case, that aggregate value of the contributed labor will result in an amortizable asset, in this case, an accreditation program, and a corresponding revenue in the financial statements. This nonfinancial asset will be amortized in accordance with the organization’s amortization policies.

Example 2 A church wants to build a new church hall and appeals to its congregation for support. In this case, architects, carpenters, electricians, plumbers, bricklayers, and other craftsmen volunteer their time and help to erect the church hall. Each of these individuals provides a statement to the church concerning the value of their time, and the aggregate value increases the value of the church hall and results in a corresponding revenue. While not-for-profit organizations often rely heavily on contributed labor in the ordinary and necessary performance of the organizations’ activities, it would be impractical to recognize all contributed labors as revenue. Not-for-profit organizations in such situations are encouraged, but not required, to disclose in the footnotes of their financial statement the fair value of these contributed services.

Contributed Collections Items A not-for-profit organization can either capitalize or not capitalize its collections in its financial statements. Capitalization of selected collections is precluded. If the not-forprofit organization has elected to capitalize its collection, the donation of new collection items would be recognized as revenues in the financial statements. Conversely, a not-for-profit organization that has elected not to capitalize its collection would not recognize current contributions as revenues or gains in the financial statements. An entity that has chosen not to capitalize its collections would disclose this and additional information in the footnotes of the financial statements. Finally, SFAS #116 indicates that it is unnecessary for entities to recognize the contributions of works of arts, historical treasures, and other similar assets if these donated items are added to collections that meet all of the following conditions: ➢ The items are held for public exhibition, education, research, or furtherance of a public service, rather than for financial gain.



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➢ The items are protected, kept unencumbered, cared for, and preserved. ➢ The items are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other collection items for future collections.

Recognition of Contributions in the Financial Statements of Not-for-Profit Organizations Contributions to not-for-profit organizations will now be classified in the new net assets section of the Statement of Activities, and will now be regarded as either unrestricted support, temporarily restricted support, or permanently restricted support. Classification into one of these accounts will depend on the donor’s wishes. Contributions without any donor-imposed restrictions will be reported as unrestricted support and will increase unrestricted net assets, while donations with restricted support will increase either temporarily restricted or permanently restricted net assets, depending on the nature of the contribution. Another somewhat controversial aspect of SFAS #116 is the recognition of unconditional promises to give in the financial statements of a not-for-profit organization. Unconditional promises to give will now be recognized in the financial statements of a not-for-profit organization if substantial documentation exists that support the promises. The receipt of an unconditional promise to give will result in revenue in the current period, and the organization will set up a sufficient allowance account on the Statement of Financial Position. An unconditional promise to give can be either restricted support or unrestricted support, depending on the circumstances of the donation. The recognition of long-lived assets received will also be recorded in the not-forprofit organization’s financial statements as either restricted or unrestricted support, depending on the nature of the gifts. Also, the not-for-profit organizations must now disclose in the footnotes of its financial statement its accounting policy concerning recognition of and classification of long-lived assets.

Expiration of Donor-Imposed Restrictions A donor-imposed restriction on a contribution can have either time restrictions or purpose restrictions, or both. In either case, a not-for-profit organization will recognize the contribution in its financial statements for the period in which the restriction expires. When a restriction does expire, the organization will make a reclassification entry increasing the value of one class of net assets while decreasing the value of another class of net asset account. Reclassifications are recorded separately from other transactions in the financial statements.


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Contributions Made Again, the provisions of SFAS #116 extend to both commercial organizations and notfor-profit organizations. Regardless, a contribution made will be recognized as an expense in the period in which the contribution is made. Contributions made shall be recognized as a decrease of assets, as in the example of a cash contribution, or as an increase of a liability account, as in the case of a promise to give. Contributions can take the form of a decrease in cash and, of course, a corresponding contribution expense, a reduction in inventory and a resulting contribution expense, or an increase in the liability account and a corresponding contribution expense.

Fair-Value Measurement The value of a noncash type of donation, such as a contribution received in the form of a service, is to be measured according to its fair value and recorded in the organization’s financial statement accordingly. Quoted market prices, if available, are regarded as the best evidence of the fair value of both monetary and nonmonetary assets. Regarding the recognition of the fair value of an unconditional promise to give cash in future periods, it is appropriate to determine the present value of these estimated future cash flows by using an appropriate discount rate. Finally, unconditional promises to give that are expected to be paid in less than one year may be measured at net realizable value.

Conditional Promises to Give A conditional promise to give that depends on the occurrence of a specified future of an uncertain event to bind the giver will be recognized in the financial statements when the condition is substantially met. When the condition is substantially met, the conditional promise becomes unconditional, and it is recorded in the financial statements accordingly. When a not-for-profit organization receives assets with conditions, the assets will be accounted for as a liability account in the Statement of Financial Position, rather than included among unrestricted, temporarily restricted, or permanently restricted net assets when the condition is met. The asset will be reclassified accordingly once the conditions placed on it are met. Finally, a conditional promise to give will be considered unconditional if it is highly likely that the condition will be met. For example, a stipulation that the donee provide an annual report to receive a subsequent annual payment is not considered a conditional promise to give, since the possibility of not meeting that administrative requirement is remote.



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Disclosure of Promises to Give Disclosure of promises to give in the not-for-profit organization’s financial statements will depend on whether the promise is conditional or unconditional. For an unconditional promise to give, the financial statements of the organization would disclose the following: ➢ The amount of promises receivable in less than one year, in one to five years, and in more than five years ➢ The amount of allowance for uncollectible promises receivable For a conditional promise to give, the financial statements of the organization would disclose the following: ➢ The amount of the amounts promised ➢ A description and amount for each group of promises having similar characteristics such as amounts of promises conditioned on establishing new programs, completing a new building, and raising matching gifts by a specified date

Financial Statement Presentation and Disclosure for Collections Again, a not-for-profit organization that holds a collection can either capitalize the collection or not capitalize the collection. A not-for-profit organization that does not recognize and capitalize its collections will report the following on the face of its Statement of Activities separately from revenues, expenses, gains, and losses: ➢ Cost of collection items purchased as a decrease in the appropriate class of net assets ➢ Proceeds from sales of collection items and an increase in the appropriate class of net assets ➢ Proceeds from insurance recoveries of lost or destroyed collection items as an increase in the appropriate class of net assets

Examples When classifying contributions in the financial statements, the following four areas must be addressed before deciding on the correct classification: 1. Are there any donor-imposed conditions (i.e., is the contribution conditional or unconditional)? 2. Should the contribution be recognized currently, sometime in the future, or not at all?


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Not-for-Profit Accounting, Tax, and Reporting Requirements 3. What is the amount of the contribution? 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets classes of accounts?

Example 1 A donor contributed $20,000 to a medical society to study a disease and to educate the public. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution should be recognized currently. 3. What is the amount of the contribution? A. The amount of the contribution is $20,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This contribution would be recorded in the temporarily restricted net asset class of accounts.

Journal Entry: Debit Credit

Cash Temporarily Restricted Net Assets Class Revenue

$20,000 $20,000

Example 2 A donor donated a building to a foundation. The building cost the donor $100,000. The building had two appraisals on the date of donation, one at $120,000 and one at $124,000. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution should be recognized currently. 3. What is the amount of the contribution? A. The amount of the contribution is $122,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts?



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A. This donation would be recorded in the unrestricted net assets class of accounts, as there are no donor restrictions on its use.


Building Unrestricted Net Assets Class Revenue

$122,000 $122,000

Example 3 A museum appealed for contributions to build a wing. Donors sent in $200,000. 1. Are the contributions conditional or unconditional? A. These are unconditional contributions. 2. Should the contributions be recognized currently, sometime in the future, or not at all? A. These contributions should be recognized currently. 3. What is the amount of the contributions? A. The amount of the contributions is $200,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. These contributions would be recorded in the temporarily restricted net assets class of accounts.


Cash Temporarily Restricted Net Assets Class Revenue

$200,000 $200,000

Example 4 An estate gifted $750,000 to a hospital. The gift is to be invested in perpetuity but the earnings can be used to offset operating costs. Treatment of the corpus: 1. Is the contribution conditional or unconditional? A. This is an unconditional gift. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This gift should be recognized currently. 3. What is the amount of the contribution? A. The amount of the gift is $750,000.


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Not-for-Profit Accounting, Tax, and Reporting Requirements 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This gift will be recorded in the permanently restricted net assets class of accounts.


Cash Permanently Restricted Net Assets Class Revenue

$750,000 $750,000

Treatment of the earnings: 1. Is the contribution conditional or unconditional? A. The earnings are unconditional. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. The earnings will be recognized currently. 3. What is the amount of the contribution? A. The amount to be recognized would be the actual earnings. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. The earnings will be recorded in the unrestricted net assets class of accounts.


Cash Unrestricted Net Assets Class Revenues

$XXX $XXX

Example 5 A high school alumna said she would contribute $100,000 from her estate to the school if she did not survive a serious forthcoming operation. 1. Is the contribution conditional or unconditional? A. This is a conditional contribution in that the only way the school would receive the gift would be if she did not survive. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. Since no money changed hands, this contribution may be recognized in the future or may not be recognized at all.



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3. What is the amount of the contribution? A. No amount of this contribution is recorded at this time. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. The contribution will not be recorded unless the condition is met.

Journal Entry: None at this time. If she does not survive the operation: 1. Is the contribution conditional or unconditional? A. The condition has been met, making this an unconditional contribution. It will be necessary to record the transaction. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. The contribution will be recognized currently. 3. What is the amount of the contribution? A. The amount of the contribution would be $100,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. The contribution would be recorded in the unrestricted net assets class of accounts since the donor did not stipulate any purpose restrictions.


Unconditional Promises to Give Unrestricted Net Assets Class Revenues

$100,000 $100,000

Example 6 A donor donated 500 shares of stock to a foundation. On the date of the gift, the stock traded at a high of $32 and at a low of $28. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution should be recognized currently.


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Not-for-Profit Accounting, Tax, and Reporting Requirements 3. What is the amount of the contribution? A. The amount of the contribution is $15,000 (500 shares times the average prior per-share value of $30). 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This contribution would be recorded in the unrestricted net assets class of accounts, as there are no donor restrictions on its use.


Investments Unrestricted Net Assets Class Revenues

$15,000 $15,000

Example 7 The board of directors of a not-for-profit organization designated $50,000 of the current year’s increase in unrestricted net assets to be set aside for future legal contingencies. 1. Is the contribution conditional or unconditional? A. There are no donors, so there is no contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. Since this is not a contribution, it will not be recognized in the financial statements at all. 3. What is the amount of the contribution? A. There is no contribution. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. The transaction has effectively already been recorded as activity in the unrestricted net assets class, and reclassification to a restricted class is prohibited.

Journal Entry: None.

Example 8 A church appealed to its congregation for assistance in building a church hall. An architect contributed his time and donated the drawings. He sent a statement that his time was worth $50,000. An attorney donated her time and sent a statement that her time was worth $20,000. Bricklayers donated their time and sent in statements that the value of their time was $30,000.



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1. Is the contribution conditional or unconditional? A. This is an unconditional contribution of services. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. These contributed services should be recognized currently. 3. What is the amount of the contribution? A. The amount of the contributed services totals $100,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This contributed labor should be included in the unrestricted net assets class of accounts.

Journal Entry: Debit

Church Hall $100,000 Credit Unrestricted Net Assets Class Revenues $100,000 (Note: The $100,000 will be added to other costs associated with building the hall and will be depreciated accordingly.)

Example 9 A commercial member of a not-for-profit organization allows the organization to use, at no charge, one of his conference rooms for the organization’s monthly board of directors meetings, as long as space is available. The member rents out the conference room to the other parties at $500 per meeting. 1. Is the contribution conditional or unconditional? A. This is conditional on the availability of the room. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution will be recognized currently if the space is used. 3. What is the amount of the contribution? A. The amount of the contribution is $500 per meeting. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This contribution would be recorded in the unrestricted net assets class of accounts, as there are no donor restrictions on its use.


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Not-for-Profit Accounting, Tax, and Reporting Requirements Journal Entry: Debit Credit

Conference Room Rental Expense Unrestricted Net Assets Class Revenues

$500 $500

Example 10 A citizen acting as the executor of her grandfather’s estate was left a journal that he kept, detailing his experiences in World War II. She gave the journal to the local historical museum. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution should be recognized currently. 3. What is the amount of the contribution? A. This contribution has no apparent value. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. Since the contribution has no value, it will not be recorded in any of the net assets class of accounts.

Journal Entry: None.

Example 11 A renowned explorer sent a $50,000 check to a hospital. The accompanying letter said that the hospital was to hold the money until the donor returned from a solo exploration of the South Pole. The letter indicated that if he did not survive the journey, the hospital could keep the funds for whatever use it desired. If he returned from the trip, he wanted the money back. 1. Is the contribution conditional or unconditional? A. This is a conditional contribution, in that the hospital could keep the money only if the explorer did not survive. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution may be recognized in the future or not at all.



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3. What is the amount of the contribution? A. The amount of the contribution is $50,000 if the condition is met. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. If the contribution is met, it will be recorded in the unrestricted net assets class of accounts.

Journal Entry: Upon the hospital’s receipt of the check and letter: Debit Cash $50,000 Credit A Liability Account $50,000 If the explorer returned safely and the money was returned: Debit The Liability Account $50,000 Credit Cash $50,000 If the explorer did not return: Debit The Liability Account $50,000 Credit Unrestricted Net Assets Class Revenues $50,000

Example 12 An art museum’s policy is to capitalize its collection. An heir of a world-famous artist donated an original painting to the museum with the stipulation that the painting could never be sold. The painting had an average appraised value of $2 million. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. This contribution will be recognized currently. 3. What is the amount of the contribution? A. The amount of the contribution is $2 million. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This contribution will be recorded in the permanently restricted net assets class of accounts.


Capitalized Collection Permanently Restricted Net Assets Class of Accounts

$2,000,000 $2,000,000


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Example 13 Q. What would the journal entry have been if the same museum in Example 12 had a policy of not capitalizing its collection? A. None, since the museum had a policy not to capitalize its collection. Rather, this information would be disclosed in the footnotes of the financial statements.

Example 14 On its dues invoice, a not-for-profit organization solicited contributions from its members, and informed them that their donations would be sent to a local charity, which is another not-for-profit organization. The organization received a voluntary contribution of $5,000. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. The contribution would be recognized currently. 3. What is the amount of the contribution? A. The amount of the contribution is $5,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. The contribution will be recorded in the unrestricted net assets class of accounts of the charity, not the original organization, which is acting as an intermediary.

Journal Entry: On receipt of the contributions: Debit Cash $5,000 Credit A Liability Account to the Charity $5,000 On remittance of the funds to the charity: Debit The Liability Account to the Charity $5,000 Credit Cash $5,000 On the charity’s books on receipt of the funds: Debit Cash $5,000 Credit Unrestricted Net Assets Class of Accounts $5,000

Example 15 A not-for-profit organization has a liability of $15,000 on its books for money owed to a CPA firm for auditing services. The CPA firm advised the not-for-profit organiza-



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tion that the debt had been cancelled because the work had been considered pro bono. 1. Is the contribution conditional or unconditional? A. This is an unconditional contribution. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. The contribution will be recognized currently. 3. What is the amount of the contribution? A. The amount of the contribution is $15,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. This contribution will be recorded in the unrestricted net assets class of accounts.


Accounts Payable Unrestricted Net Assets Class of Accounts

$15,000 $15,000

Example 16 A charity embarked on a fund-raising event and included pledge cards in its promotional materials. The charity received pledges totaling $17,000. 1. Is the contribution conditional or unconditional? A. These are unconditional contributions. 2. Should the contribution be recognized currently, sometime in the future, or not at all? A. These contributions will be recognized currently. 3. What is the amount of the contribution? A. The amount of the contributions is $17,000. 4. Will the contributions be recorded in the unrestricted, temporarily restricted, or permanently restricted net assets class of accounts? A. These contributions will be recorded in the unrestricted net assets class of accounts.


Pledges Receivable Unrestricted Net Assets Class of Accounts

$17,000 $17,000


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Example 17 A not-for-profit chamber of commerce was awarded a $30,000 grant from a county government to conduct an economic impact study for the county. The results of the study are to be included in a report sent to the county at the conclusion of the grant. Q. Will the transaction be recorded in the chamber of commerce’s records? A. Since this is a grant, it will not qualify as a contribution in the chamber’s records. Instead, this transaction would be handled in accordance with the chamber’s accounting policies concerning grant accounting.


APPENDIX

C

Statement of Financial Accounting Standards #124 Accounting for Certain Investments Held by Not-for-Profit Organizations Background Prior to the adoption of SFAS #124, the accounting treatment of investments held by not-for-profit organizations was generally inconsistent. The lack of required accounting treatment of investments resulted in some not-for-profit organizations reporting investments in their financial statements at cost, some at the lower of cost or market, and some at market valuation. All not-for-profit organizations must now comply with the new provisions of SFAS #124. As in the case of SFAS #116 and #117, the resulting consistency will benefit everyone connected with the statement.

Highlights SFAS #124 addresses investments in the following: ➢ Equity securities with determinable fair value. ➢ All debt securities with determinable fair value. ➢ The statement does not apply to equity securities accounted for under the equity method or to investments in consolidated subsidiaries. The fair value of equity securities is determinable if any of these three conditions are met: 1. Values are available via a recognized U.S. stock exchange. 2. Foreign securities are traded in a foreign market similar to U.S. stock exchanges. 3. The value of mutual funds is published currently. Reprinted with permission from Not-for-Profit Organization’s Guide to the New Accounting Ruling. Copyright U.S. Chamber of Commerce, September 1996.

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Effective Date The statement is effective for fiscal years beginning after December 15, 1995.

Scope SFAS #124 applies to all not-for-profit organizations, including, but not limited to, trade organizations, professional associations, charities, foundations, chambers of commerce, boards of trade, hospitals, universities, and museums.

Inconsistencies If an inconsistency arises concerning the provisions of SFAS #124 and prior AICPA pronouncements, including FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, the provisions of SFAS #124 will apply and other provisions and prior announcements no longer will be acceptable.

SFAS #124 Reporting Revenues In accordance with SFAS #117, Financial Statements of Not-for-Profit Organizations, all revenues are to be reported in the Statements of Activities as increases or decreases in unrestricted net assets, unless their use is temporarily or permanently restricted by the donor.

Example 1 A donor makes a cash gift of $50,000 to a not-for-profit organization. The donor stipulates that the corpus is permanently restricted and the earnings are restricted for the use of Program A. The gift earned interest of $3,000 in year one.

Journal Entry: On award of the gift: Debit Restricted Cash $50,000 Credit Permanently Restricted Net Assets On receipt of $3,000 interest revenue: Debit Restricted Cash $3,000 Credit Program A Revenues $3,000

$50,000

Example 2 A donor makes a gift of $20,000 in stock to a not-for-profit organization. The donor stipulates that the gift is permanently restricted and the dividends are unrestricted. Dividends in the amount of $1,000 were received in year one.



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Journal Entry: On award of the gift: Debit Permanently Restricted Investment $20,000 Credit Permanently Restricted Net Assets $20,000 On receipt of $1,000 dividend income: Debit Unrestricted Cash $1,000 Credit Unrestricted Net Assets Revenue $1,000

Example 3 A donor made a $25,000 gift of stock to a not-for-profit organization. The gift and all earnings related to the gift are restricted for the use of Program B. Earnings for year one were $2,000.

Journal Entry: On receipt of $25,000 gift of stock: Debit Temporarily Restricted Investment $25,000 Credit Temporarily Restricted Net Assets $25,000 On receipt of $2,000 earnings: Debit Temporarily Restricted Cash $2,000 Credit Temporarily Restricted Net Assets Revenue $2,000

Reporting Investment Gains and Losses Again, in accordance with SFAS #117, gains and losses will be recorded in the Statement of Activity as increases or decreases in unrestricted net assets unless their use is permanently or temporarily restricted by the donor.

Example 1 A donor makes a gift of $75,000 in stock, stipulating that the corpus is permanently restricted and earnings and gains are unrestricted. The gift earned $6,000 in dividends at year-end, and the fair value of the original gift was $85,000 at year-end.

Journal Entry: On receipt of the gift: Debit Permanently Restricted Investment $75,000 Credit Permanently Restricted Net Assets $75,000 On receipt of $6,000 in dividends: Debit Unrestricted Cash $6,000 Credit Unrestricted Net Assets Revenue $6,000 Recording the $85,000 fair value at year-end: Debit Permanently Restricted Investment $10,000 Credit Unrestricted Net Assets Revenue $10,000


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Example 2 A donor made a gift of $50,000 in stock, stipulating that both the corpus and the earnings are to be used for Program C. The gift earned $2,500 in dividends. At year-end the fair value of the gift was $40,000.

Journal Entry: On receipt of the gift: Debit Temporarily Restricted Investment $50,000 Credit Temporarily Restricted Net Assets $50,000 On receipt of $2,500 in dividends: Debit Temporarily Restricted Cash $2,500 Credit Temporarily Restricted Net Assets Revenue $2,500 Recording the $40,000 fair value at year-end: Debit Temporarily Restricted Net Assets Revenue $10,000 Credit Temporarily Restricted Investments $10,000

Example 3 A donor made a $2 million gift in stock and stipulates that the corpus is permanently restricted but the earnings are unrestricted. The gift earned $150,000 in dividends. At the end of year one the fair value was $2 million.

Journal Entry: On receipt of the gift: Debit Permanently Restricted Investment $2,000,000 Credit Permanently Restricted Net Assets $2,000,000 On receipt of $150,000 in dividends: Debit Unrestricted Cash $150,000 Credit Unrestricted Net Assets Revenue $150,000 Recording the $2 million fair value at year-end: Debit Permanently Restricted Investment $100,000 Credit Unrestricted Net Assets Revenue $100,000 Note: Gains and losses on investments increase or reduce the value of the asset in the financial statements and appear as a gain or loss in the unrestricted net assets class of accounts unless gains and losses are temporarily or permanently restricted by the donor.

Disclosures Statement of Activity ➢ Investment income composition and net gains or losses on investments at fair value ➢ A reconciliation of investment return and description of accounting policy



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Statement of Financial Position ➢ Segregation of investments by type—equity securities, real estate, U.S. obligations, and so forth ➢ The basis for computing values for other than equity securities with determinable fair value and all debt securities ➢ Accounting policy used to estimate fair value of other than financial instruments ➢ Deficiencies on donor-restricted endowments



APPENDIX

D

Statement of Financial Accounting Standards #136 Transfer of Assets to a Not-for-Profit Organization or Charitable Trust that Raises or Holds Contributions for Others Background The provisions of SFAS #116, Accounting for Contributions Received and Contributions Made, does not address “transfers of assets in which the reporting entity acts as an agent, trustee, or intermediary, rather than as a donor or donee” (paragraph 4). This standard is applicable to such organizations.

Highlights SFAS #136 addresses the following areas: ➢ Accounting of transactions between a not-for-profit organization or charitable trust (the recipient organization) and another entity eventually receiving all or part of the donated assets (the beneficiary) ➢ Transactions that are not technically contributions ➢ Disclosure of fund-raising expenses ➢ Guidance on situations where one organization has “variance power” over another

Effective Dates SFAS #136 affects financial statements issued after December 15, 1999.

Scope SFAS #136 applies to any not-for-profit organization receiving assets, all or part of which will be distributed to another organization.

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Inconsistencies SFAS #136 supersedes FASB Interpretation #42, Accounting for Transfers of Assets in Which a Not-for-Profit Organization Is Granted Variance Power.

Discussion SFAS #136 establishes standards for transactions in which a donor makes a contribution by transferring assets to a not-for-profit organization or charitable trust (the recipient organization) that accepts the assets from the donor and agrees to (a) use those assets on behalf of or (b) transfer those assets, the return on investment of those assets, or both, to a beneficiary specified by the donor. It also establishes standards for transactions that take place in a similar manner but are not contributions because the transfers are revocable, repayable, or reciprocal.

The Recipient SFAS #136 requires a recipient organization that accepts cash or other financial assets from a donor and agrees to (a) use those assets on behalf of or (b) transfer those assets, the return on investment of those assets, or both, to a specified unaffiliated beneficiary, to recognize the fair value of those assets as a liability to the specified beneficiary concurrent with recognition of the assets received from the donor. However, if the donor explicitly grants the recipient organization variance power or if the recipient organization and the specified beneficiary are financially interrelated organizations, the recipient organization is required to recognize the fair value of any assets it receives as a contribution received. Variance power may be defined as having the authority to redirect the funds. Not-for-profit organizations are financially interrelated if (a) one organization has the ability to influence the operating and financial decisions of the other and (b) one organization has an ongoing economic interest in the net assets of the other. With this guidance, FASB is clearly saying that in most cases federated fund-raising organizations such as the United Way should not record contributions for the amounts they receive that are designated by the donor for a specified beneficiary.

The Beneficiary The specified beneficiary recognizes its rights to the assets held by a recipient organization as an asset of its own, unless the donor has explicitly granted the recipient organization variance power. Those rights are either an interest in the net assets of the recipient organization, a beneficial interest, or a contribution receivable. If the



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beneficiary and the recipient organization are financially interrelated organizations, the beneficiary is required to recognize its interest in the net assets of the recipient organization and adjust that interest for its share of the change in net assets of the recipient organization (equity method). If the beneficiary has an unconditional right to receive all or a portion of the specified cash flows from a charitable trust or other identifiable pool of assets, the beneficiary is required to recognize that beneficial interest, measuring and subsequently remeasuring it at fair value, using a valuation technique such as the present value of the estimated expected future cash flows. If the recipient organization is explicitly granted variance power, the specified beneficiary does not recognize its potential for future distributions from the assets held by the recipient organization. In all other cases, a beneficiary recognizes its rights as a contribution receivable. SFAS #136 also details four circumstances in which a transfer of assets to a recipient organization is accounted for as a liability by the recipient organization and as an asset by the resource provider because the transfer is revocable or reciprocal. Those four circumstances are: 1. The transfer is subject to the resource provider’s unilateral right to redirect the use of the assets to another beneficiary. 2. The transfer is accompanied by the resource provider’s conditional promise to give or is otherwise revocable or repayable. 3. The resource provider controls the recipient organization and specifies an unaffiliated beneficiary. 4. The resource provider specifies itself or its affiliate as the beneficiary, and the transfer is not an equity transaction. If the transfer is an equity transaction and the resource provider specifies itself as beneficiary, it records an interest in the net assets of the recipient organization (or an increase in a previously recognized interest). If the resource provider specifies an affiliate as beneficiary, the resource provider records an equity transaction as a separate line item in its Statement of Activities, and the affiliate named as beneficiary records an interest in the net assets of the recipient organization. The recipient organization records an equity transaction as a separate line item in its Statement of Activities.

Disclosure SFAS #136 also includes two new disclosure requirements. First, if an organization chooses to disclose a ratio of fund-raising expenses to funds raised, it must disclose how it computes that ratio. Second, an organization that transfers assets to a recipient organization and names itself as the beneficiary must disclose the recipient organization receiving the transfer, whether variance power was granted, the terms under


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Not-for-Profit Accounting, Tax, and Reporting Requirements which the recipient organization will distribute the assets, and the aggregate amount recognized in the Statement of Financial Position and whether the amount is reflected as an interest in the net assets of the recipient organization or as another asset.

Examples Scenario A not-for-profit organization allows potential donors three choices in its annual fund-raising campaign: donors can give without restrictions, direct their donations to one of three activities conducted by the not-for-profit organization, or specify that the donation be transferred to another not-for-profit organization.

Example 1 A donor makes an unrestricted gift to the not-for-profit organization.


An Asset Account at the Fair Market Value of the Gift Contributions Revenue

$XXX $XXX

Example 2 A donor makes an unrestricted gift but specifies that it be used to fund one of the activities monitored by the not-for-profit organization.


An Asset Account at the Fair Market Value of the Gift Temporarily Restricted Net Assets

$XXX $XXX

Example 3 A donor makes an unrestricted gift but directs that the gift be transferred to another not-for-profit organization.

Journal Entry (on the books of the recipient organization): Debit Credit

An Asset Account at the Fair Market Value of the Gift A Liability Account

$XXX $XXX

Journal Entry (on the books of the beneficiary organization): Debit

Accounts Receivable at Net $XXX Credit Contributions Revenue at Net $XXX (Note: Recipient organizations would record the gift under the provisions of SFAS #116, #117, and #124.)



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Scenario Instead of the situation described earlier and the first three examples, the not-forprofit organization retained the right to redirect gifts if the organization made the decision that other needs are greater. In this situation, the not-for-profit organization has exercised variance power.

Example 4 A donor makes a gift under the previously noted scenario.

Journal Entry (on the books of the recipient organization): Debit Credit

An Asset Account at the Fair Market Value of the Gift Contributions Revenue

$XXX $XXX

Journal Entry (on the books of the beneficiary organization): None.

Scenario A church solicits contributions to fund a scholarship for an individual at a seminary.

Example 5 The church receives contributions.

Journal Entry: Debit

An Asset Account at the Fair Market Value Credit A Liability Account The church transfers the asset to the seminary.

$XXX $XXX


The Liability Account A Liability Account to the Individual

$XXX $XXX

Scenario An individual creates an account at a bank (a trustee) that will distribute assets in accordance with the individual’s directions to a not-for-profit organization. The bank and the not-for-profit organization are not financially interrelated. (Note: SFAS #136 does not establish standards for commercial organizations, i.e., the trustee bank.)

Journal Entry (on the books of the not-for-profit organization): There are a few possible journal entries, depending on whether the account held by the bank is irrevocable, whether just the earnings will be remitted to the not-forprofit organization, and so on. The not-for-profit organization will record journal entries in accordance with the provisions of SFAS #116, #117, and #124.


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Financially Interrelated Organizations There will be occasions when donations are received by one not-for-profit organization that is financially interrelated to another not-for-profit organization. An example of two financially interrelated organizations would be a not-for-profit hospital and the hospital’s foundation. The basis for determining whether two not-for-profits are financially interrelated is a thorough examination of the relationship between the two organizations via analysis of their respective board representation, studying both organization’s bylaws, and so forth. If it is determined that the two not-for-profit organizations are, in fact, financially interrelated, the standard directs that it is probable the equity method of accounting should be employed and accounting for contributions is complex, and the statement of SFAS #136 should be studied in its entirety very carefully.

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Glossary

Accrual Accounting. Accounting method by which revenue is recognized when earned and expenses are recognized when incurred. It attempts to match revenue and expenses independently of cash receipts and disbursements. Aged Statements. A report breaking down the accounts receivable and accounts payable schedules into monthly categories based on the original date of the invoice. Amortization. Expensing an intangible asset or leasehold improvement over its useful life. Assets. Economic resources, including cash, receivables, property, and intangibles. Audit Exceptions. Problems incurred during the course of an audit by the independent CPA or the IRS. Audited Financial Statement. Financial statement audited by an independent CPA who has issued an accompanying opinion letter. Balance Sheet. See Statement of Financial Position. Board-Designated Funds. Amounts designated by a board of directors for specific internal restrictions. Board-designated funds are included among unrestricted net assets and have no legal or accounting significance because the restriction has not been placed by a donor. Book Value. The carrying value of an asset or liability, regardless of actual or market value. It is computed at cost less accumulated depreciation.

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Glossary Capital Budget. Budget that projects cash required to purchase fixed assets and the resulting depreciation calculations. Capital Lease. A lease that is recorded as an asset and depreciated rather than expensed on the financial records as payments are made. Capitalization. Recording the cost of assets purchased on the organization’s Statement of Financial Position rather than expensing them in the period purchased. Capitalized assets are depreciated. Cash Accounting. Accounting method by which revenue is recognized as cash is received and expenses are recognized as cash is disbursed. Cash Flow Budget. Budget that projects cash available balances at the end of each month to ensure that sufficient cash is available to meet ongoing obligations and to maximize investment opportunities. Collections. Assets that meet the following three criteria: 1. It must be held for public exhibition as a service rather than for financial gain. 2. It must be kept protected, unencumbered, preserved, and cared for. 3. If sold, proceeds must be used to acquire other collection items. Not-for-profit organizations are not required to capitalize collections of works of art, historical items, and the like, and donations of such items are not recorded as contributions in the financial statements unless the collection is capitalized. Rather, these contributions will be disclosed in the footnotes of the financial statements. Conditional Promise to Give. The donor is not bound to keep the promise of a donation unless a specific future event occurs (a condition). Conditional promises to give are not recorded in the financial statement until and unless the condition is met. Continuous Budgeting. A process whereby monthly budgets are projected a year in advance every month after the current period’s financial statements are prepared. Contribution. A voluntary, nonreciprocal transfer of labor, cash, or other assets from one entity to another. A contribution may also be a cancellation of debt. Cost of Goods Sold. The actual cost of items sold to the organization that the organization intends to resell.


Glossary

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Credit. An entry in an account that will result in a reduction in an asset account, an increase in a liability account, or a decrease in an expense account. Current Assets. Cash and cash equivalents plus assets that are expected to be converted to cash or consumed during the next 12 months. Current Liabilities. Obligations due to be paid during the next 12 months. Current Restricted Funds. See Temporarily Restricted Net Assets. Current-Year Budget. Also called tactical plan. Organization’s financial goals for the current year. Debit. An entry in an account that results in an increase in an asset account, a reduction in a liability account, or an increase in an expense account. Debt Security. A security indicating a creditor relationship with an organization. Debt securities include applicable preferred stock, applicable mortgage obligations, U.S. government securities, municipal securities, corporate bonds, commercial paper, convertible debt, and all securitized debt investments. Trade accounts receivable usually do not meet the definition of debt security. Deferred Charges. Also known as prepaid expenses. An expenditure incurred in one period, the benefits of which are not realized until a later accounting period. It is recorded as an asset on the balance sheet. Deferred Revenue. Revenue received before it is earned. It is recorded as a liability on the balance sheet. Depreciation. Expensing a tangible asset over its economic life. Donor-Imposed Condition. Prevents the receiving organization from recording a contribution in the financial statements until a future condition specified by the donor has been met. If the condition has not been met, the organization must either return the asset or forgive the promisor of any obligation. Donor-Restricted Endowment Fund. See Permanently Restricted Net Assets. Endowment Fund. See Permanently Restricted Net Assets.


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Glossary Equity Security. Represents an ownership interest, such as common stock or preferred stock. Also includes the rights to acquire, such as warrants, rights, and call options. Expensing a Disbursement. Recording a disbursement of cash as an expense in the financial records rather than capitalizing the disbursement and recording it as an asset in the financial records. Fair Value. The amount at which an asset could be bought or sold by willing parties, including quoted prices on a domestic or foreign stock exchange. Does not include forced sales. Financial Ratio. Computation to assess an organization’s ability to pay debt, earning power, return on investment, and so forth. Functional Accounting. Method of accounting that classifies revenues and expenses according to specific goals, departments, functions, and so forth. Functional Classification. Assigning revenues and expenses to specific supporting or program activities of a not-for-profit organization. General Fund. See Unrestricted Net Assets. Generally Accepted Accounting Principles (GAAP). A technical term encompassing conventions, rules, and procedures governing acceptable accounting practice. Generally Accepted Auditing Standards (GAAS). Assumptions and rules that govern the CPA’s ability to accept an auditing engagement and procedure that must be undertaken during the course of the audit. Gross Revenues. The grand total of revenues received before deducting associated costs of goods sold and discounts taken. Imprest Fund. Also known as petty cash fund. Cash kept on hand to pay for minor expenditures. Income Statement. See Statement of Activity. Intangible Asset. A nonfinancial asset to an organization with economic value. Examples include purchased copyrights with future royalty benefits, and so forth.


Glossary

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Internal Financial Statement. Unaudited financial statement used for management purposes only. IRS Form 990. Information return required to be filed by not-for-profit organizations. IRS Form 990-T. Tax return required to be filed by not-for-profit organizations for tax on unrelated business income. Leasehold Improvement. An expenditure that improves leased property, such as the purchase of office carpeting. The value of the improvement transfers to the owner of the property after the lease terminates. Liability. Obligation to pay an amount or render services as a result of a past transaction. Long-Range Plan. Organization goals projected five or more years into the future. Natural Classification. Classifying revenues and expenses as line items in the financial statements rather than by functions. Net Assets. Section of the Statement of Financial Position that includes unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Net Revenues. Gross revenues less associated cost of goods sold and discounts taken. Net Worth. See Unrestricted Net Assets. Nonreciprocal Transfer. A contribution of labor, cash, or other assets from one entity to another. The donating entity must not receive anything of value in return and does not retain any right to have the contribution returned under any circumstances. Not-for-Profit Organization. An organization exempt from federal income taxes under Internal Revenue Code Section 501(c), and which possesses the following characteristics: ➢ There is no owner equity interest. ➢ Earnings must not enure to individuals.


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Glossary Operating Lease. An expense line-item lease. Operating lease expense is recognized on the financial statements as payments are made. Permanent Restriction. A restriction placed on assets contributed to a not-forprofit organization that the not-for-profit organization must hold in perpetuity. Earnings may be either temporarily restricted or unrestricted. Permanently Restricted Net Assets. Formally called endowment funds. Permanently restricted net assets can be in the form of cash, securities, collection items, buildings, and so forth, and must be held by the not-for-profit organization in perpetuity. Earnings from permanently restricted net assets can be either temporarily restricted or unrestricted. Plant Fund. An obsolete not-for-profit organization account. Prepaid Expenses. Also known as deferred charges. An expenditure incurred in one accounting period, the benefits from which are not realized until a later accounting period. It is recorded as an asset on the balance sheet. Promise to Give. An unconditional or conditional written or oral agreement to make a contribution of labor, cash, or other assets from one entity to another. Quid Pro Quo Contribution. Contribution for which the donor receives some value in return. Restricted Support. Revenues or gains from contributions that are restricted by the donor and not included in the unrestricted class of accounts. Retirement of Assets. Removing the cost and accumulated depreciation of an asset from the financial statements and records. Statement of Activity. Revenues, expenses, and results of activities of not-forprofit organizations. In commercial organizations, this statement is called the income statement or profit and loss statement. Statement of Changes in Net Assets. Financial statement of a not-for-profit organization indicating how results of operations have affected unrestricted net assets (net worth of the organization), temporarily restricted net assets, and permanently restricted net assets.


Glossary

169

Statement of Financial Position. Assets, liabilities, and net assets of a not-for-profit organization. In commercial organizations, this statement is called the balance sheet. Temporarily Restricted Net Assets. Assets held by a not-for-profit organization, the use of which is for a specific purpose specified by the donor. Temporary Restriction. A donor-imposed restriction requiring a not-for-profit organization holding the asset to use the asset for a specific purpose or an asset that reverts to the unrestricted class of accounts upon the passage of time. Unconditional Promise to Give. A contribution binding on the promisor. Unrestricted Net Assets. The cumulative excess of revenues over expenses (deficit) of a not-for-profit organization that are not restricted by donors to the permanently restricted or temporarily restricted net assets classes of account. Unrestricted Support. Contributions not restricted by donors for a specific purpose. Voluntary Health and Welfare Organizations. Not-for-profit organizations organized to address health and welfare problems and funded by voluntary contributions. Their Statement of Activity must be presented using both the functional and the natural method.


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Index

Accounting and Financial Policies and Procedures, 69 Data Processing Manual, 72 Forms Manual, 71 Preparing the Manual, 70 Records Retention and Destruction Manual, 72 Retired Forms Manual, 71 Year-End Manual, 72 Accounting Methods, 91 Balance Sheet (Statement of Financial Position), 58, 59 Board-Designated Funds, 56 Capitalization Cutoff Points, 70 Charitable Contributions, 81, 135, 137 Contributed Collections, 136 Contributed Services, 135 CPA Firms, 13 Adverse Opinions, 18, 19 Audit Fieldwork, 30 Audits, 13 Choosing a Firm, 26 Compilations, 24, 25 Disclaimers of Opinion, 20, 21

Engagement Letter, 29 Management Letter, 30 Qualified Opinions, 16, 17 Request for Proposal (RFP), 26, 27 Reviews, 22, 23 Services, Other, 26 Types of Opinions, 14 Unqualified Opinions, 14, 15 Current Restricted Funds, 56

Disclosure of Information, 9, 84 Group Returns, 10 Method of Inspection, 10 Names of Contributors, 10 Penalties, 11 Place of Inspection, 10 Time of Inspection, 11 Dividends, 52

Employees versus Independent Contractors, 77 Endowment Funds, 56 Excess Benefits Transactions, 93 Excise Tax, 95 Extensions to File, 43

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172

Index

Financial Accounting Standards Board, 85 Fixed-Assets Funds, 57 Footnotes to Financial Statements, 131 General Fund, 56 Generally Accepted Accounting Principles, 13, 85 Generally Accepted Auditing Standards, 13 Imprest Funds, 73 Income Statement (Statement of Activities), 14, 86 Intermediate Sanctions, 93 Internal Control, 63 Internal Control Checklist, 65 Investments, 151–155 IRS Audits, 33 Avoiding Audits, 33 Handling Audits, 34 IRS Classifications 501(c)(1), 5 501(c)(2), 5 501(c)(3), 2 501(c)(4), 2–3 501(c)(5), 3 501(c)(6), 3–4 501(c)(7), 4 501(c)(8), 5 501(c)(9), 5 501(c)(10), 5 501(c)(11), 5 501(c)(12), 5 501(c)(13), 5 501(c)(14), 5 501(c)(15), 5 501(c)(16), 5 501(c)(17), 5 501(c)(18), 5 501(c)(19), 4 501(c)(20), 5

501(c)(21), 5 501(c)(22), 5 501(c)(23), 5 501(c)(24), 5 501(c)(25), 5 501(d), 6 501(e), 6 501(k), 6 527, 6 528, 6 IRS Forms 990, 10, 11, 83, 97, 99 990-BL, 10, 83 990-C, 83 990-EZ, 10, 11, 83, 97–99 990-PF, 11, 83 990-T, 10, 43, 83 1023, 10 1024, 10 1065, 10, 83 1120-H, 83 1120-POL, 10, 83 1120-W, 44 2758, 83 4506-A, 11 7004, 43 8109, 44 Lobbying, 75 Communication to Members, 76 Deductibility, 75 Local Lobbying, 75 Optional Proxy Tax, 48, 76 Proxy Tax, 48 Reporting Requirements, 76 Safe Harbor, 76 Tax Calculation, 76 Net Assets, 104 Nonprofit versus Not-for-Profit, 85


Index

173

Permanently Restricted Net Assets, 60 Petty Cash Fund Disbursements, 73 Private Foundations, 7 Promises to Give, 138–139

Statement of Financial Accounting Standards #136, 157–162 Statement of Financial Position (Balance Sheet), 61, 104

Quid Pro Quo Contributions, 82

Tax-Exempt Status, 86 Temporarily Restricted Net Assets, 60

Receipts, 63 Required Statements, 81 Restricted Funds, 55 Revenue Ruling 87-41, 79 Statement of Activities (Income Statement), 109 Statement of Cash Flows, 124–128 Statement of Changes in Net Assets, 128–130 Statement of Financial Accounting Standards #116, 133–150 Statement of Financial Accounting Standards #117, 101–132 Statement of Financial Accounting Standards #124, 151–155

Unrelated Business Income, Tax on, 43, 49 Advertising, 47 Debt-Financed Property, 47 Estimated Taxes, 44 Income from Controlled Organizations, 47 Regularly Carried on, 46 Substantially Related, 45 Trade or Business, 45 Unrelated Business Income, 45, 46 Unrelated Business Income Exemptions, 46 Unrestricted Net Assets, 59 Wholly Owned Taxable Subsidiaries, 51

Not-for-Profit Accounting, Tax, and Reporting Requirements

Corporate Financial Accounting & Reporting

International Accounting and Reporting Issues: 2006 Review

International Accounting: Standards, Regulations, Financial Reporting ACT

Corporate Financial Accounting & Reporting, 2nd Edition

Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability

Sustainability Accounting and Reporting (Eco-Efficiency in Industry and Science)

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Fair Value for Financial Reporting: Meeting the New FASB Requirements

Tax and Corporate Governance

Requirements Engineering

Tax Fraud & Forensic Accounting: Umgang mit Wirtschaftskriminalität

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Relating Software Requirements and Architectures

Requirements Analysis and System Design

Mark-to-market Accounting: 'True North' in financial reporting (Routledge New Works in Accounting History)

Accounting

Accounting

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International Commercial Tax (Cambridge Tax Law Series)

Accounting

NAEP Reporting Practices: Investigating District-Level and Market-Basket Reporting

Reporting Discourse, Tense, and Cognition

Research, Standard Setting, and Global Financial Reporting (Foundations and Trends in Accounting)

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Accounting (Accounting Carl S. Warren)

Financial and Managerial Accounting

Not-for-Profit Accounting, Tax, and Reporting Requirements

Corporate Financial Accounting & Reporting

International Accounting and Reporting Issues: 2006 Review

International Accounting: Standards, Regulations, Financial Reporting ACT

Corporate Financial Accounting & Reporting, 2nd Edition

Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability

Sustainability Accounting and Reporting (Eco-Efficiency in Industry and Science)

Project Management Accounting: Budgeting, Tracking, and Reporting Costs and Profitability

Sustainability Accounting and Reporting (Eco-Efficiency in Industry and Science)

Fair Value for Financial Reporting: Meeting the New FASB Requirements

Tax and Corporate Governance

Requirements Engineering

Tax Fraud & Forensic Accounting: Umgang mit Wirtschaftskriminalität

Accounting

Relating Software Requirements and Architectures

Requirements Analysis and System Design

Mark-to-market Accounting: 'True North' in financial reporting (Routledge New Works in Accounting History)

Accounting

Accounting

Accounting

International Commercial Tax (Cambridge Tax Law Series)

Accounting

NAEP Reporting Practices: Investigating District-Level and Market-Basket Reporting

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Research, Standard Setting, and Global Financial Reporting (Foundations and Trends in Accounting)

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